What you need to do after deciding to hire an employee in a new state
Expanding your workforce into a new state? Before you finalize that offer letter for your first employee there, be aware: you're likely stepping into a new realm of compliance. Each state has distinct requirements for businesses operating within its borders, even if your only presence is a single remote employee. Failing to register properly or set up the correct tax accounts can lead to significant issues down the line. Let's break down the critical steps you need to manage when onboarding an employee in a state where you haven't operated before.
Understanding State and Local Compliance Requirements: The Crucial First Step
Before diving into specific registration tasks, it's vital to recognize a fundamental reality of multi-state employment: compliance requirements vary significantly not only from state to state, but often down to the city and county level. Simply replicating the processes used in one state is rarely sufficient and can lead to significant legal and financial risks.
Beyond Federal Law: While federal laws provide a baseline for employment standards (like minimum wage via the FLSA or leave via the FMLA), states frequently impose stricter or additional obligations. This includes areas like:
· Wage and Hour Laws: Minimum wage rates, overtime calculations, pay frequency, and final pay requirements can differ substantially.
· Paid Leave: Mandated paid sick leave, paid family leave, or other specific types of paid time off are increasingly common at the state and even city level, each with unique accrual, usage, and notification rules.
· Hiring Practices: Some jurisdictions have "ban the box" laws restricting inquiries about criminal history, or specific requirements for offer letters and background checks.
· State-Specific Forms: Unique state tax withholding forms (beyond the federal W-4) or specific new hire notification forms may be required.
· Industry Regulations: Certain industries might face additional licensing or compliance standards in specific states.
The Local Layer: Don't overlook municipal ordinances. Major cities or counties may have their own minimum wage, paid sick leave laws, predictive scheduling rules, or local payroll taxes that apply in addition to state requirements. Hiring an employee in downtown Chicago, for instance, necessitates understanding Illinois state law and Chicago-specific ordinances.
Establishing Nexus: Hiring an employee who performs work within a state or locality typically establishes a legal connection, or "nexus," for your business there. This nexus is what triggers your obligation to comply with that jurisdiction's employment laws and tax requirements, even if you have no physical office building in that location. Read our blog Understanding Economic and Physical Nexus in the United States for more information.
Why Diligence Matters: Failing to understand and adhere to these varied requirements can result in costly penalties, back pay assessments, employee lawsuits, and damage to your company's reputation. Therefore, thorough research specific to the exact location where the employee will be working is not just recommended it's essential before you onboard them. This proactive approach ensures you're prepared to meet all legal obligations from day one.
Registering Your Business: Formalizing Your Presence to Operate Legally
Many states require that employers register as a foreign entity or obtain a certificate of authority before conducting business in the new state. Keep in mind that:
· Some states consider employing a remote worker as “doing business” but not all do.
· The registration process is not yet accessible online in all states, and mailing the application and receiving the certificate by mail can be a lengthy process, so it’s important to plan ahead.
· Many states require that a company register to do business in the state before they can obtain tax accounts or proceed with onboarding an employee.
Navigating State Taxes: Registering for Withholding, Unemployment, and Sales Tax Accounts
Income or Payroll Tax. Register with the Department of Revenue for an income tax withholding account for states that have an income tax. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming do not have state income tax.
Don't assume 'no income tax' means no tax obligations. Washington state, for example, lacks a general income tax but does tax certain high value capital gains. Furthermore, states without personal income tax still rely on other revenue sources, commonly including sales taxes, property taxes, and essential employer paid taxes like Unemployment Insurance.
Sales and Use Tax. Obtain a sales tax permit or license that complies with the sales tax laws where the employer has a nexus a physical or economic connection to the state. An employee physically located in a state will constitute a physical nexus so employers must collect and remit sales tax in that state. If a company has new sales in a state where they have not previously paid sales tax and hires an employee there, this might generate a significant sales tax cost to the company. Triggering sales tax will require registration and updating the company’s internal invoicing systems.
Unemployment Insurance. Most states require employers to provide unemployment insurance if they have employees in the state. Different states have different unemployment insurance rates and obligations. Companies should register for unemployment insurance in each state. Register with the state Department of Labor. The Personal Responsibility and Work Opportunity Reconciliation Act is a federal law intended to help obtain payment for child support orders and to reduce fraud in government benefits. This act requires employers to report certain data about a new hire to the state within 20 days from the employee’s start date. This is a federal law, but states differ on the registration process and the required time frame of reporting new hires.
Obtain Workers’ Compensation. Companies should contact their insurance broker to ensure that the company’s Workers’ Compensation coverage includes the new hire.
Register for State Programs. Some states provide additional leave beyond what is required by federal Family and Medical Leave. In some states that provide paid family or medical leave, employees receive payment from the state instead of from the company while on leave. States with this structure of leave generally withhold a portion of all employees’ compensation and submit it to the state’s leave authority. Companies must register with the state leave authority to set up a paid leave account and indicate how they will submit payments to the state leave authority.
Conclusion:
Successfully onboarding your first employee in a new state requires careful planning and attention to detail beyond standard hiring procedures. Establishing your company’s presence involves several critical steps: formally registering your business, setting up state tax accounts (including income/payroll, sales/use, and unemployment insurance), complying with new hire reporting laws, securing workers’ compensation coverage, and enrolling in any mandatory state programs like paid family leave. Because regulations vary significantly from state to state, proactive research and timely action are essential.
Partnering with In2America can significantly reduce or even eliminate this administrative burden. Through our Employer of Record (EOR) services, we legally employ your U.S. based team on your behalf, so you can avoid the need for state entity registrations, tax withholding accounts, or workers' compensation policies. For companies that already have a U.S. entity but want support managing the complexities of employment, we also offer Professional Employer Organization (PEO) services handling payroll, benefits, compliance, and HR support while you remain the legal employer. Whether you're hiring in one state or many, and whether you need full EOR support or just a trusted HR partner, In2America offers the flexibility to meet you where you are and grow with you as your needs evolve.