How to hire an out-of-state employee (the right way)

Mixed race businesswoman walking in conference table with map in background

Are you considering hiring an employee in a neighboring state but not sure how to go about it? Do you have an existing employee that is moving out of state, but you’d like to keep them as an employee?

Don’t let geography stop you from hiring quality talent

You can prepare your business for out-of-state employees in four easy steps:

  1. Establish whether the employee is travelling to work in your state or working from home.
    • If the employee is working at the company office but lives outside the state, you will likely need to pay state unemployment tax and withhold state income tax for the state in which your office is located. Unless your two states have a reciprocal tax agreement (see step 2), the employee may have to pay taxes both to their home state and to your business state.
    • If the employee is living and working outside your business state, you will likely need to pay state unemployment tax and withhold state income tax for the employee’s resident state.
  2. Determine whether the employee’s resident state has a reciprocal income tax agreement with your state.
    • If the employee lives in a neighboring state, you might be able to pay only state unemployment tax to your business state and withhold state income tax for the employee’s resident state. The employee must fill out an exemption form that allows their income not to be taxed in the state in which your office is located.
    • For more info, refer to Reciprocal Agreements: States That Do Not Tax Certain Out of State Workers on About.com.
  3. Once you’ve determined the above two criteria, you may need to apply for employer tax accounts to pay taxes on behalf of the employee. Many states have unique registration requirements, so talk to your payroll specialist for specific forms and guidance.
  4. Make sure you look into workers’ compensation insurance for your new employee. It’s an often-overlooked but important aspect of hiring out-of-state employees.
    • Most states require some form of workers’ compensation insurance. If you already have a policy with a company in your own state, it is likely all you’ll need to do is talk to them about adding the employee to your policy.
    • If you don’t already have a policy with a company, you’ll need to determine if your new employee’s resident state requires this insurance. While some states mandate private insurance through a company, others include workers’ compensation automatically as a tax included in payroll, such as Washington’s Labor & Industries tax. To find out if your state requires workers’ compensation insurance, start with this table within the Workers’ Compensation Laws - State by State Comparison article from NFIB.com.

And finally, should you have any remaining questions or concerns, don’t hesitate to reach out to your payroll specialist.

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