You need to file payroll for multiple states if you have employees that live in one state and work in a different state. Growing businesses often source remote work from employees who do not live in-state. When it comes time to figure out which taxes to withhold from an out-of-state remote employee’s paycheck, the process might seem confusing.
Complying with tax requirements for multiple states can be frustrating. Make your multi-state payroll process smoother with the help of AMS tax software.
Remote Worker Classifications
The first step to determining payroll for multiple states is determining remote worker classifications, including the type of worker and their resident vs. nonresident state.
- Employees: you are responsible for withholding taxes on their behalf
- Independent contractors: you are not responsible for withholding taxes on their behalf
- Resident state: a state where your employee lives (see employee’s W-4)
- Nonresident state: a state where your employee works, but does not live
You are usually responsible for withholding taxes in the state where your employee works, whether that is their resident or nonresident state. Let’s say your company operates out of Massachusetts, and your employee works remotely in Delaware. You will pay state unemployment tax and withhold income tax in Delaware. If your remote employee works in-state, then you will pay state unemployment tax and withhold income tax for your state. If your employee works in your state but lives in a different state, you will pay unemployment tax and withhold income tax for your state.
In the midst of the Covid-19 pandemic keeping many of us at home, remote work is more and more common. Some states have changed their tax requirements as a result of the pandemic-induced increase in remote work. Check in with your state’s requirements before filing.
Filing 940 Schedule A
You will likely file 940 Schedule A, the Multi-State Employer and Credit Reduction Information form, if you pay employees in more than one state.
Employers need to have unemployment accounts in each state they plan to file. Reach out to the state’s unemployment agency to obtain an unemployment account.
Filling out 940 Schedule A form includes noting the states where your employees reside, and reporting the credit reduction, reduction rate, and Federal Unemployment Tax Act (FUTA) taxable wages. You should be able to easily find this information, but you can consult the 940 Schedule A instructions for further support. There are several ways to configure multi-state payroll, and the IRS discusses how to calculate FUTA tax for several distinct configurations.
AMS also provides an in-depth guide to preparing for and filling out 940 Schedule A here.
Using AMS Payroll for Multiple States
Payroll details are your key to successfully filing 940 Schedule A. Both AMS Payroll and Forms Filer Plus support this federal form. AMS Payroll stores personal employee information so you can easily find the states where your employees live. The Forms Filer Plus is a quick and simple way to organize payroll for multiple states. You’ll enter information on 940 Schedule A form facsimiles. Save even more time with the E-File software, a module that automatically files necessary forms with the IRS/SSA with just a few clicks.