Payroll Tax Outsourcing

The increase in connective technology for the office, plus the Covid pandemic, fueled many changes for employers. Among them is the large increase in employees working remotely and relocating to other states. This remote work can sometimes mean that employers are hiring new employees, or that existing employees are relocating, in states where the employer has never had a tax presence. Both of these circumstances have payroll tax implications for both the employer and employee if the tax withheld is for the wrong state.

On the outset, it seems that a remote employee relocation is straightforward, as they can work on a laptop with a cell phone from any location. However, for employers there are payroll tax  tax repercussions for their employees’ wages in these other states.

How Payroll Taxes Work for Small & Large Businesses

Employers turn to both their payroll managers and their accountants for help; however, payroll tax work falls outside of the scope of both professionals. Flex HR has a payroll tax department dedicated to this specialized work for companies everywhere.

When an employee is hired or chooses to relocate to a state where the employer hasn’t previously had a presence there are multiple implications. The employer needs to do the following:

1. First, this is a great time to check in with your employee and ask if their bank account or Form W-4 needs updated. For example, did they move as the result of a marriage? They may need to file married filing jointly. At a minimum, the employee should update the Form W4 with the address in their new home state.
2. Set up an SUI (state unemployment insurance) account in the state where the employee is physically working. In the majority of states, only the employer pays
3. Set up an SIT (state income tax) account in the state where the employee is living. There are special exceptions to this rule, and FlexHR can guide you for taxing transient employees.
4. Set up LIT (local income tax) withholding account registrations, where needed.
5. Once you receive account information for all applicable agencies, update the payroll platform with the agency account number, tax rate, and wage base
6. You must sign Power of Attorney forms or designate Third Party Administrator access in most states for your payroll platform to remit these taxes on your Company’s behalf.

Once the appropriate numbers have been set up for the new state or states, the employer must ensure Worker’s Compensation coverage is secured in this state and review human resources compliance tracking items for the affected states. The employer also needs to update the employee handbook accordingly and monitor any standard operating procedures. This could involve the following:

• Need to post jobs with the salary disclosed
• Pay any accrued wages or unused PTO for the calendar year on termination date
• Make sure that rules are followed for the salary requirement for any hourly or exempt employees
• Ensure the proper documentation is recorded at termination for an exiting employee
• Close any applicable state tax accounts if the exiting employee was the only employee in the state

Why Outsource Payroll Taxes Processing?

When a company retains Flex HR for its payroll tax work, a comprehensive approach is taken. First, we set up an information gathering session to fully understand your needs. We get a current employee census, audit your existing payroll journals and tax returns, and determine where specific employees are located. We will note if any employees are being taxed in a state that does not match their home address and determine next steps to correct any historically incorrect tax withheld.

Next, we put together a plan for setting up current state tax-related payroll numbers and identify the priority for each state. This involves communication with various state and local agencies.

We work with your payroll manager to make sure all state tax account numbers are entered correctly in the system for any affected employees. Working with your HR manager, we ensure all state human resources compliance items are properly documented.

Employment – Federal, State & Local Taxes

Flex HR is able to resolve any prior employment tax issues and often negotiates with the state to abate any historic tax fees or penalties. We then act as a mediator with your payroll provider to ensure tax compliance and resolution.

Regardless of the state, there are general employment taxes that must be paid for by the employer. These include:

• Federal income tax withholding based on what the employee fills out in their W4
• FICA (Federal Insurance Contributions Act), which includes social security and Medicare taxes, including any additional medicare tax for high earners
• FUTA (Federal Unemployment Tax Act), which is exclusively paid for by all for-profit employers
• State Unemployment Insurance, required in all 50 states

State-related tax implications are varied and can sometimes involve local municipalities. They can include the following:

• Some states require employers to withhold state income tax, while other states don’t have a state income tax.
• State income tax, much like social security tax, is consider a tax “held in trust” by the employer, which means there can be heavy interest and penalties if not remitted properly.
• Some cities have income taxes, which means it’s an additional wage withholding.
• If returns are not received, states will send a tax notice with estimated wages and tax, which are often much higher than what was truly paid
• There are other withholdings in various locations that can be required, including:
  • Paid family leave
  • Short-term disability
  • Employee portion of SUI
  • Monopolized Worker’s Compensation

Employers across the country trust Flex HR with their HR and payroll issues. The department within Flex HR can help employers immeasurably with recouping items owed and eliminating legal exposure.