If you own a company and have employees that travel, live, and work in different states, have you ever wondered about their state employment-related taxes? For example, if you own a company in Virginia but two of your employees live in Florida, how will they be taxed? Are they taxed based on Virginia tax rates, or Florida’s? A C2 federal contracting client recently raised this issue to us because the client has employees working in about five different states on different federal contracts. Below is the analysis we went through with the client in helping them evaluate the different types of taxes and withholding issues to consider.
A. State Taxes
The majority of states, like the federal government, make individuals pay an income tax; there are only nine (9) states that do not. Those states that have no income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — which leaves forty-one (41) other states that impose an income tax.
In whichever state your employee is working, they are subject to that state’s income tax, unless the state has a reciprocal agreement with the employee’s home state (i.e., state in which they permanently reside). A reciprocal agreement is one in which two states allow residents of one state to request exemption from tax withholding in the other state. There are nine (9) states that impose a flat tax rate, which means everyone in that state pays the same tax percentage. Those states include Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. The three (3) states with the highest tax rate in the US today are California (13.3%), Hawaii (11%), and Oregon (9.9%), while the three (3) with the lowest tax rates are Pennsylvania (3.07%), Indiana (3.23%), and North Dakota (2.9%).
Major sports teams are a good way to illustrate the issue, because their employees frequently “work” (i.e., play games) in different states. For example, if the Dallas Cowboys play a game in Los Angeles, the players and coaches on their teams will have to pay applicable state income taxes for California on the wages earned in the state. Incidentally, the Oakland Raiders will be the one team who will greatly benefit when it comes to state income taxes. They are moving from Oakland (with California having the highest state income tax rate) to Las Vegas (where Nevada has the lowest income tax rate). A new twist on the tax issue that the athletes and coaches do not like is that there are games being played in London and now even Mexico, where players and coaches have to pay taxes in that country. The taxes are so bad in London that famous athletes like Rafael Nadal and Usain Bolt have refused to play in Great Britain. This year will be the first time in NFL history where a team plays more than one (1) game in London (the Jacksonville Jaguars). The Jaguar players and coaches will have to pay two (2) games worth of Great Britain employment taxes, as opposed to paying zero in taxes had they played those games in their home state of Florida, which does not impose a state income tax.
B. Paid Sick Leave Requirements
There is no federal law in the U.S. that requires paid sick leave. However, many states have passed laws requiring that employees earn paid sick leave. Arizona, California, Washington DC, Maryland, Massachusetts, Michigan, New Jersey, Oregon, Rhode Island, Vermont, Washington, parts of Illinois, Minnesota, New York, Pennsylvania, and Texas all have paid sick leave requirements. Some of these states are even funding the paid sick leave through payroll taxes. California and Rhode Island fund their programs through an employee payroll tax, while New Jersey, New York and Washington state impose payroll taxes on both employees and employers. The D.C. paid leave benefits are funded by a 0.62% quarterly payroll tax on employers, which is based on the immediate past quarter of gross or total wages paid. Wage replacement rates among the states range from 50 percent to 90 percent, while the length of family leave varies from four (4) to twelve (12) weeks (with longer periods for medical disability).
C. Disability Taxes
State Disability insurance sometimes drives another type of payroll tax. There are five (5) states that fund all or a portion of disability payments via a payroll tax on employees and/or employers. Those states include California, New Jersey, Rhode Island, Hawaii, and New York. Within these states, the disability taxes fund either Temporary Disability Insurance (TDI) or State Disability Insurance (SDI), depending on the specific program set up by each state.
D. Workers’ Compensation
Employees catch a break when it comes to workers’ compensation benefits. Such state-derived benefits are funded exclusively by the employers. Workers’ compensation systems vary from state to state, but employers pay for workers’ compensation typically in one of three ways: premiums to a state-run insurance program, payments to an insurance company, or directly to workers (if the company is self-insured). Workers’ compensation is a form of accident insurance paid by employer, so no payroll deductions from employees’ salaries are necessary. Even better for employees, workers’ compensation benefits are not generally subject to federal or state income tax. However, if an injured worker receives both supplemental social security income and worker’s compensation, then they may end up paying some income tax. When an employee receives both benefits simultaneously, the Social Security benefits are taxable to a certain extent.
E. Conclusion
Overall, if you have out of state employees or employees who will be working periodically in other states, their state income taxes can be tricky. Therefore, employers should research the applicable states’ tax laws before onboarding new employees to work there. Finally, check if the state has paid sick leave, disability taxes, workers’ compensation, or other benefits funded via payroll deductions. You should be informed on the different, applicable taxes so that your company is able to remain compliant, as well as provide the correct tax and withholding information to your employees.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.
