Whether you're running a small agency powered by employees across various states or an employer with a fully distributed workforce operating in multiple states, you're responsible for managing the complexities of multi-state payroll.
Upwork predicts that 32.6 million Americans will work remotely by 2025, and FlexJobs found that nearly 60% of workers would look for a new job if their current company didn't let them work remotely.
With this increase in remote work and hiring talent across states, managing multi-state payroll is crucial. We're breaking down what it is, what challenges to expect, and a few best practices for navigating payroll administration across state lines.
What is multi-state payroll?
As the name implies, multi-state payroll is the process of managing payroll for employees who work in different states. It includes complying with:
- State employment laws
- State taxation differences
- Wage and hour laws
Like with general payroll tax law, you must pay employee wages, properly report taxes, and withhold the right amount of taxes for things like Social Security and Medicare.
Multi-state payroll can be complex to account for at first, but it is crucial for growing businesses to address. If done incorrectly, you could face legal issues with compliance — pay careful attention to the unique requirements of each state where your employees live and work.
Multi-state payroll challenges
Hiring and operating in multiple states comes with a handful of challenges (don't worry, our tips will help you overcome them), like labor laws, tax rates, and state unemployment insurance (SUI).
Labor laws
Every state has different employment laws, including minimum wage requirements, overtime laws, and employee leave policies. Plus, some municipalities have unique wage and hour laws that can further complicate payroll administration.
- Minimum wage. More than half of the states in the United States set minimum wage requirements exceeding those of the federal government — if your employees work in any of those states, you need to meet those requirements.
- Overtime. Some states have stricter overtime laws than others (or the federal government), and you must comply with the various laws. Keep in mind that how states determine overtime varies, too, with some basing it off hours worked per day or week.
- Employee leave. Some states have mandatory paid family leave, while others have voluntary systems. And many states offer different leave programs, including paid family, sick, parental, and school leave that are funded through employee-paid payroll taxes.
Staying on top of and complying with individual state laws (where your employees live and work) is a must to avoid penalties or having to painstakingly edit payroll tax errors.
Taxation rates
You'll need to adjust payroll tax withholdings based on where your employees live. Everyone pays federal income taxes, but not every state taxes wages. Some states use a single-rate tax structure that applies to all taxable income, while others have multiple rates and brackets.
Understanding state-specific tax requirements and accurately calculating and withholding taxes is crucial for compliance and avoiding penalties.
SUI
The employer funds 100% SUI (in all but three states), and the rates vary across states. State unemployment insurance generally pays unemployment benefits to people who lost their jobs and meet eligibility requirements. But some states also collect additional payroll taxes for things like workforce development.
To ensure compliance and avoid penalties or fees, you must understand the differences in the SUI tax rates and laws in the states where your employees work.
Effective ways to manage multi-state payroll
Streamline multi-state payroll as much as possible with software, automation, and maybe even a little professional help. Here's what we suggest:
- Get a centralized payroll system. Simplify payroll processes with a payroll system that consolidates employee data and automates calculations and reporting. If it integrates with your human resources (HR) and accounting systems, you can ensure accurate and efficient payroll management.
- Leverage compliance software and services. Compliance software and services can automate tax calculations and filings, keeping businesses up to date with regulatory changes. It helps reduce the risk of errors, penalties, and non-compliance.
- Professional payroll services. Alleviate the administrative burden while ensuring compliance across states by partnering with a team of payroll experts. Payroll services providers are well-versed in multi-state regulations and can handle all payroll-related tasks efficiently and accurately.
- Employee self-service portals. Implementing employee self-service portals gives employees access to their payroll information — like pay stubs and tax forms — reducing HR administrative tasks.
Multi-state payroll best practices
Need some help managing multi-state payroll? Start with these best practices.
Conduct regular compliance audits
Wage and hour laws differ — and change — for every state. Regularly review payroll processes and conduct audits to make sure you're compliant with individual state laws. If there are any updates to the laws, address them quickly.
Maintain accurate employee records
Managing multi-state payroll means keeping track of your employees' records. Did an employee move to another state? Is their tax information accurate?
Keeping employee records updated, including their work location, hours worked, and more, is essential to effective multi-state payroll management and avoiding the penalties that come with non-compliance.
Provide ongoing training for HR and payroll staff
If you choose to keep your payroll administration in house, make sure your team has the necessary skills and stays updated on payroll regulations in all of the states in which you have employees. Continual training and paying for courses so they can grow their knowledge base is a good start. You can even incentivize employees to upskill or earn certifications that will help them be more effective.
But if you're working with a skeleton crew or your team is already overburdened, outsourcing some of the work to a payroll services partner can help lessen the burden and provide updates on regulatory changes.
Leverage technology for efficiency
Technology is one of the best ways you can help your payroll team out by automating and streamlining processes. Payroll software that connects to your other essential tools can help you become more accurate and efficient, especially when dealing with the nuances and complexities of multi-state payroll.
The benefits of a payroll services partner
If you want help managing multi-state payroll, partnering with a payroll services company can help in a number of ways.
They have expertise in multi-state payroll regulations
Payroll services partners like OneSource Virtual (OSV) specialize in multi-state payroll and stay in the know about the latest laws and regulations. They have the knowledge and experience to make sure you're compliant across states.
They’ll save you time and money
Outsourcing payroll gets rid of the need to invest in additional staff and systems. Not only does this save money, but a payroll services provider saves time by reducing how long your team works on tasks associated with managing payroll internally, like:
- Calculating payroll
- Generating reports
- Preparing and submitting taxes
They provide enhanced data security
Payroll processing involves confidential data, making data security even more important. The right payroll outsourcing partner can help ensure data security and confidentiality with redundant backups and quality systems for storing and managing data.
For example, OSV works directly in a customer's Workday platform. By removing the need for integrations and data transfers, your data stays safe in the system you trust most.
They allow for scalability and flexibility
Working with a payroll services partner gives you more flexibility as you scale. They can easily accommodate the needs of growing businesses with employees in multiple states. They'll partner with you to handle payroll administration for 100 or 10,000 employees, letting you scale without adding an extra burden.
Partnering with a payroll services company can provide peace of mind, so you can choose to focus on core operations or strategic initiatives, all while ensuring accurate and compliant multi-state payroll management.
About OneSource Virtual
With a trusted partner with years of experience, you can breathe a sigh of relief as they take care of everything your team doesn't have the time or skill for. That's exactly what we do at OSV.
We deliver in-tenant technology and expert services to automate the administrative, transactional tasks of payroll and payroll taxes in Workday. With over 1,000 customers and 95% customer retention, OSV is the leading exclusive provider of Business-Process-as-a-Service (BPaaS) solutions for Workday customers.
Want to hear how we can help you? Get in touch.
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