Stay Compliant When Hiring Out-of-State Employees

In today’s tech-connected work environment, there are a growing number of businesses using out of state employees. A valued employee no longer needs to be in the office for a successful partnership. Each state has its own rules on how employees are hired and employed. Here are some of the business obligations to consider.

  1. Register with the Secretary of State in your employee’s resident state. This is referred to as a “foreign qualify” and formally declares you will be performing business within that state and will comply with all the applicable laws and regulations. You must also maintain a registered agent and office in that state (cannot be a post office box number).
  2. Register with Department of Revenue in your employee’s resident state. Stay current on the state and local municipality tax rates and filing deadlines since every state has different income tax requirements.
  • Research whether or not there’s a reciprocal income tax agreement with your state. If yes, your employee can submit an exemption form. With an exemption, you will withhold taxes for the employee’s resident state only.
  • Secure a State Employer Identification Number (EIN). You will need to file tax returns according to the state’s frequency and pay that state’s required taxes.
  • Determine if the state mandates disability or workers compensation insurance.
  1. Register for a new unemployment insurance account number within 30 days. Typically you can do this with the Department of Employment Security. Every state requires quarterly returns to be filed and paid.
  2. Complete Employment Eligibility Verification – Employee must fill out the “Form I-9” from the Department of Homeland Security to verify their identity and confirm they are legally allowed to work in the U.S. This form must be signed and verified by a company representative who is in the presence of the employee AND their documents. That means it cannot be done via Skype or by having the employee e-mail/fax over the documents. This will require either meeting with the employee personally or enlisting the assistance of a Notary that the employee can see and have the Form I9 verified. Many notaries charge for this service.
  3. Register with the State Directory of New Hires of the designated state where your employee works within 20 days from hire for child support enforcement. If you have employees in multiple states, you can choose to designate one state where all new hires will be reported. This consolidates new hire reports, but you need to sign up as a multistate employer and notify the US Department of Health and Human Services in writing.

Navigating each state’s requirements can be overwhelming. The IRS has a page with state-specific websites providing information for employers. You can also partner with a PEO (professional employer organization) that specializes in handling all the payroll and tax implications involved in hiring remote talent. At MidwestHR, a top PEO in Illinois, we help our clients retain the talent they need regardless of where they live while remaining compliant with all the local requirements. Give us a call to learn how we can help you.