Businesses that have multiple operations in different states across the United States are considered multistate companies. These companies are subject to tax laws and payroll-related requirements not just at the federal level - but also on the state level for every state they have subsidiaries in. In fact, Bloomberg says multi-state tax compliance is one of the most difficult responsibilities businesses face.
Businesses are required to pay the federal minimum wage - which has been $7.25 per hour since July 24, 2009 - unless the state minimum wage is higher.
Let's say your business is located in Erie, Pennsylvania. If you employ minimum wage workers, you pay them $7.25 per hour, since Pennsylvania's minimum wage is equal to the federal rate. But say you open a new location in New York (the border is just a few miles down I-90 from Erie). You'll have to pay the same workers doing the same job $9.70 per hour (and $10.40 per hour next year, with additional annual increases after that).
It's critical for payroll and human resources teams to stay on top of these changes. We created a State-By-State Minimum Wage Breakdown. It's a 2-page PDF that serves as a quick reference guide to look up the current (and future) minimum wage rate for every U.S. state and territory.
The systems multi-state companies use must be prepared to handle the differences in terms of reporting deadlines imposed by the law in different states and they must be able to calculate the tax withheld from the employee’s wages in a correct manner.
What happens when you employ people in one state but they live in another? Multi-state companies can usually withhold state taxes for the state in which the services are being performed when their employees live and work in the same state. Of course, every state is different and has their own rules for this process.
Payroll managers, of course, need to know their states' regulations when it comes to income tax withholding. Some states actually have reciprocal tax agreements. (We previously wrote about news surrounding the reciprocal tax agreement between New Jersey and Pennsylvania). These types of arrangements allow organizations to withhold only for the state of residence, instead of the state of operations. States without these arrangements require companies to consider the laws of both states.
The solution to all these problems is a complex and integrated company management system, managed by employees who keep abreast all the changes in tax and payroll-related legislation. With this in place, multistate operations become much simpler and easier to manage.
Check out our comprehensive employer's guide to payroll taxes - a structured and simple overview of what employers need to know about the taxes that flow through payroll - on both the employer and employee side.