Technology Can Help Prevent Tax Withholding Miscues Tied to Remote Work

Organizations have been able to sidestep many of the obstacles presented by hybrid work through the use of such technologies as Zoom and Slack, which keep remote workers connected and productive. Yet as companies continue to offer employees the ability to work anywhere, anytime as a way to compete for top talent, the adjustment to remote work hasn’t proved quite as easy for back-office functions like payroll.

Allowing employees to work from different states as part of hybrid-work models has placed new stress on payroll and time and attendance technologies, as well as on the HR professionals who oversee them. A complex mix of state and local tax laws means that employees who work remotely from different jurisdictions are subject to widely varying payroll tax withholding practices. Consider the remote worker who relocates from a company’s San Francisco headquarters to the Midwest to enjoy a lower cost of living, or the employee with an office in New York City who works part time from a home in Connecticut or Pennsylvania.

Experts say it’s not just state-by-state payroll tax withholding that organizations need to master to avoid being hit with stiff penalties or accumulated interest for mistakes. States also have varying tax rates for unemployment benefits, disability insurance, and paid family and medical leave that need to be withheld from employee wages. 

Payroll Compliance Issues

While the challenges of multistate payroll tax compliance aren’t new, experts say the issue has been compounded by the rise in remote work and the growing number of small businesses without established HR functions—or payroll tax expertise—that are hiring or deploying workers across state or country borders. 

It’s a payroll tax compliance issue akin to that faced by professional athletes who travel to play games, says AJ Griffin, director of government and community affairs for Paycom, a payroll systems and HR technology provider in Oklahoma City. “Their taxes need to be calculated for each separate city or state where they play, not where they live or where the team is based,” she explains.

The complexities of multistate and global payroll tax compliance also are no longer just the concern of large or multinational enterprises. “Small businesses lacking HR expertise may not even be aware of the risk they could be taking financially by hiring across state or country borders,” says George LaRocque, founder and principal analyst of WorkTech, an HR technology advisory firm in New York City.

Sam Grinter, a London-based senior principal analyst specializing in human capital management technologies with research and advisory firm Gartner, agrees that risks related to compliance are growing for smaller companies that employ workers in jurisdictions different from the one where headquarters is located. 

“It can pose a tax withholding and compliance challenge without the right payroll technology systems and knowledge on staff,” he says.

HR leaders also need to be mindful of varying wage and hour laws in different states and the fact that not every state defines exempt employees in the same way.

“When nonexempt employees work in different state or local jurisdictions, there are wage and hour requirements for payment of overtime that vary from state to state,” says Tracy Sigmann, legal compliance director for ADP, a payroll and HR technology systems provider in Roseland, N.J.

Payroll tax withholding laws also can depend on the length of time employees work remotely in different states, Sigmann says. “In New York, for example, once someone has worked there for two weeks, you have to withhold tax,” she notes. “Many of the states are cracking down on these tax compliance issues now.”

How Technology Solutions Can Help

The use of modern payroll technology platforms can help address many of these compliance challenges through automated features capable of handling multiple tax withholding scenarios. Experts say businesses seeking technology as one piece of the solution to the problem have two options depending on their needs and budgets. 

One choice is to invest in a robust payroll technology system that can be localized for many different states. “If a business is growing and looking at having even more employees working remotely in the future, there are HR and payroll technologies that are more national or regional in nature to account for multistate payroll,” LaRocque says. “Those companies might consider investing in or switching to platforms that can bring more functionality as well as more benefits partners.”

Such payroll technologies should be able to automate multistate payroll tax calculations and ensure businesses remain in compliance, Griffin says. “The system should allow a company or its employees to enter addresses for both home and work and, based on those entries, receive the recommended jurisdictional tax withholding to be filed and paid,” she explains.

The platform also should be transparent in terms of showing employees how their multistate taxes are calculated, according to Griffin. “It’s important the technology allows employees to review and approve each paycheck and verify the accuracy of taxes being deducted prior to the payroll check date,” she says.

A second technology option that can be a good fit for smaller companies without formal HR departments is to enter into a professional employment outsourcing arrangement. In such partnerships, a professional employer organization (PEO) performs tasks such as payroll or benefits administration for clients through a “co-employment” model, leasing its employees to a company to perform HR duties. PEOs typically provide compliance guidance and all-in-one payroll technology platforms as part of the outsourcing contract.

Experts say PEOs can bring important expertise to small businesses, such as with regard to visa applications and tracking systems if the business plans to hire employees from multiple countries. “PEOs traditionally have been used by organizations opening up sales offices in new countries,” Grinter says. “But increasingly, we’re seeing PEOs used by smaller organizations to support employees in new states from a payroll and HR perspective.”

LaRocque says it has become more common for companies with 100 or fewer employees to partner with PEOs, since organizations that grow beyond that size tend to establish their own HR expertise and invest in technology platforms. 

“PEOs take all of the payroll tax, compliance and reporting burdens away from organizations,” he says. “Many have compliance experts on staff who can protect against penalties for payroll tax withholding errors by staying abreast of changes in rules and regulations in various states.” 

PEOs typically price their services in one of two ways. Some charge client organizations a percentage of the clients’ payroll, taxes and workers’ compensation for each pay period. Other PEOs charge per-month, per-employee fees for use of their services, and they often include separate setup fees.

Plan to Succeed

Adopting a hybrid-work model can give organizations a leg up on competitors in recruiting and retaining talent that in the wake of the pandemic has become hard to find and keep. Yet failing to plan for how such shifts in workforce policy can impact back-end operations such as cross-border payroll payments can bring unwelcome surprises. Deploying the right mix of technology solutions and payroll tax expertise can help HR head off those compliance missteps.

Dave Zielinski is a freelance business journalist in Minneapolis.

Illustration by Michael Korfhage for HR Magazine.