Nexus Tax: Hiring an Out-of-State Employee
March 23rd, 2023 | 11 min. read
Are you waiting to hire your first worker in a different state because you don’t know all of your obligations? If so, it can become even more complicated if your hire creates a tax responsibility in another state, also known as tax nexus.
What do you need to do when hiring an out-of-state employee? It depends on a few things, such as if you’re doing business in that other state or not, which state you’re hiring in, and even some cities matter if you’re hiring in them, too!
At CSI Accounting & Payroll, we’ve been working with small businesses for more than 50 years. In that time, we’ve been asked about the implications of hiring in other states quite a bit! How do you keep up with multi-state compliance? Small business owners often want to know:
- What is nexus tax, and how is it created?
- What are all of the steps for accounting and payroll that I need to take when hiring out of state?
- How can I get help with setting up tax accounts in a new state?
Creating Nexus Tax
Just like individuals, companies have both federal and state returns. So, what are the tax implications if you hire in another state?
Nexus is a connection linking two or more things - in this case, linking states. Nexus tax can be created when you hire in another state as long as you also do business there or have a location there.
Over $100k in sales or 200 transactions per year generally means you must collect sales tax from your purchasers and remit it to the state. You can still have sales tax nexus but not income tax nexus, but it doesn’t usually work the other way around.
Steps to Take When Hiring Out of State
When you want to hire an out-of-state employee, there are steps involved on the payroll and the accounting side that are relatively the same. Missing them may result in letters or penalties, but most of all, it’s a disservice to the employee.
Step #1: Secretary of State
The first step is to register with the Secretary of State for the state that your new employee lives and works in. You should register to do business there as a foreign entity.
Step #2: Department of Revenue
Determine whether or not you have withholding tax in this state. If you hired a remote worker who lives and works in the state, set up a withholding tax account there. It’s where their tax return will be. Most states also have different reciprocity agreements with other states - typically the states on their borders.
Next, find out if you will have income tax in this state. Do you have S-Corp, corporate, or partnership tax? You may have income tax nexus if you have a piece of the PIE: Property, Income, or Employee in that state. If so, you may need to set up an income tax account.
Finally, you need to see if you have sales tax in this state. Do you have any sales in that state that are taxable? If so, be sure to set up a sales tax account.
Step #3: Department of Economic Development
Don’t forget to set up an unemployment account if you’re hiring! Your payroll requires an unemployment ID number from the Department of Economic Development for your employee in another state.
Step #4 and Beyond: Miscellaneous Taxes
Determine if there will be disability deductions or not. There may not be a separate account. There are currently five states with mandatory employee contribution disability plans:
- New Jersey
- New York
- Rhode Island
Are you required to get workers’ compensation insurance through the state via a monopolistic state fund? There are currently four states that require this:
- North Dakota
How do you get a workers’ compensation insurance quote?
Find out if your worker is affected by municipalities, or local taxes. A worker will typically have to pay local taxes for both where they work and where they live. The following states have local taxes:
- New Jersey
- New York
- West Virginia
How to Get Help With Setting Up Tax Accounts in a New State
When you work with big-name, national payroll services, they don’t offer the little things that make small payroll services so great to work with. That includes setting up the accounts listed above!
At CSI Accounting & Payroll, we’re happy to guide you - and if you need us to take over, we’re happy to set up the accounts for you for an additional fee. We understand the payroll and tax sides of hiring an out-of-state employee. This is yet another benefit of bundling your accounting and payroll under one roof.
Hire Out of State With Confidence
If you’re stalling your business’s growth because you’re worried about multi-state compliance, you’re doing yourself a disservice!
Now that you know more about nexus tax, the steps to take when you hire out of state, and how small payroll services like CSI can help you set up certain accounts, you can count on your insight to help you make the hires that your business needs.
If you’d like to have a conversation about whether or not CSI Accounting & Payroll can be the right fit for your business, click the button below for a free consultation.
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Bret began working at CSI in 2007. Over the years, he worked his way up from an entry-level marketing position to his current role of manager of our payroll service. Bret is largely responsible for the growth of our payroll division over the last several years. His previous experience and knowledge in sales and management are exemplified in his success here. Bret has a college degree in Computer Networking, a skill that certainly comes in handy in an office environment. Bret is also a Certified Payroll Professional (CPP). Fun Fact: As an active duty member of the United States Marine Corps, he served in Operation Desert Shield and Desert Storm.