Setting Up Payroll for Employees in Multiple or Different States

Setting up payroll for employees in multiple or different states can be tricky as most employers, (especially small business owners), and most people in general have likely only had experience paying payroll taxes in their home state.

Technology has made it possible for small business owners to reach across state lines, coast to coast, and beyond to find the most capable employees to fit their company vision and do 'the work.' This type of reach has expanded the wonderful possibilities of business for these companies and allowed them to find talent that may not be available to them locally, but it has also created some challenges in terms of payroll processing that can impact the business from a compliance standpoint and from an employer-employee relationship standpoint.

These types of issues can result in penalties, fines, and employee turnover - which can be costly.

The most important thing to remember is that every state is different and even some cities and local municipalities have their own taxes that may need to be deducted from the employee's pay depending on where they live, where they work, or both.

Below are some of the 'State Level Taxes' to watch out for.

State Income Tax
State Unemployment Tax
County Taxes
City Taxes
Local Taxes (School District Taxes, etc...)

These taxes may or may not apply depending on the state, city, or county the employee is employed in. Also, it is VERY important to take note of where the employee lives and where the employee works - which may be two different states (this occurs quite often in certain regions of the country) - and you will be paying different state taxes to the lived in state vs the worked in state.

The IRS and State Governments are watching you to make sure you're in compliance and your employees are counting on you to get their paycheck calculation correct.

I see a lot of small business owners in particular lean toward outsourcing in these situations. I have numerous 2 to 7 employee companies that carry employees in 2, 3, 4, or more states, and the compliance risk is often something more cost effectively managed by a payroll processing company.

If this is something impacting your small business and you have questions about what outsourcing looks like, free to reach out to me via phone or email.

Making a Mid-Year Switch in Payroll Services

Making a Mid-Year Switch to a Payroll Services Company isn't as challenging as it used to be and shouldn't cause you to lose any sleep.

Many years ago, a mid-year conversion would cause employees to receive two W2s at year end, and make the current quarter filings a potential mess.

Thank goodness technology has caught up.

I generally see the following scenarios when bringing on a new client for payroll and tax filing services...

Current System - Transitioning To - Payroll Services Company

1. In-house payroll (using software) - to - Payroll Services
2. Manual payroll (using spreadsheet docs or doing payroll by hand) - to - Payroll Services
3. Payroll Services (using another p.s. company) - to - Payroll Services
4. Accountant/Bookkeeper - to - Payroll Services

In any of these cases, the same approach is usually taken with the Payroll Company:

• You'll want to exchange copies of the Quarterly Filing Reports (Both Federal and State(s)) for any of the Quarters that have passed so far this year.
• You'll want to exchange payroll reports for each payroll so far in the current quarter, so that they can accurately file and deposit for the current quarter.
• You'll want to grab a Year to Date Payroll Report (Jan. 1st - Today)
• In both the per payroll reports and the year to date report it is important that those reports be broken down as follows:

Employee Name: Hours worked | Gross Pay - Taxes - Deductions = Net Pay

This is done to make sure the Payroll Company knows who's been paid what, and what taxes and deductions have come out of who's pay.

After that you're just looking to pass along Employee W4 information and possible Direct Deposit Information if applicable.

The Payroll Company may want to see receipts of tax payments made so far during the current quarter and may ask if there are any taxes due from previous payrolls you would like them to deposit on your behalf.

After your new Payroll Services Company has set up your account, and before you begin processing payroll with them, you'll want to verify that the data in their system matches that of the data on the reports you turned over or uploaded to them.

Verify the Employee Data as well, but its a good best practice to ask your employees to verify their W4 information on their first paystubs also.

Keep an eye out and don't be afraid to ask questions. And while service and results will always vary based on individuals and companies involved, there shouldn't be any technical reason to hold back in making a change in Payroll Services mid-year if you trust the people you're working with and they have a solid history of helping other companies make a transition.