A lot of people have this idea that they can just open a shop in whatever state they want and just send the paycheck to the person working remotely. Well, it’s actually more complicated than that because there are some things you need to consider to ensure compliance when it comes to hiring from outside of your state.
At The Bottom Line®, we’ve been doing this for almost 10 years now.
How states have different laws and statutes
When you are thinking about bringing someone new onto your team from a state your business is not currently in, you need to understand that every state has their own laws. Some states are income tax states for individuals and may have special considerations.
And then, occasionally, states may offer payroll related tax breaks. So, you want to be aware of those breaks and take advantage of them. You can't just assume that everything's local to where your business is headquartered. You've got to be aware of each state's laws.
It's a nice idea to believe you can hire anybody from anywhere, but then you have to start counting the cost of what that hire really means administratively, financially, and from a tax perspective, too.
The importance of a handbook
When people bring on employees, one of the first things we talk to them about is we are their partner processor, protector, but we're not HR experts. We know just enough to be dangerous, but we certainly know people who are HR experts like Tameaka Shelton from Employ and Relate.
Tameaka is an HR consultant, and they have a wonderful program to help employers stay compliant with HR and handbooks. No one ever really thinks about the handbook. And generally, business owners don't think about updating the handbook when they go to a new state.
It's important because that handbook is a legal and binding document. It's essentially treated as a legal and binding contract. And as long as everything is great, it's outta sight outta mind, but if there is ever an issue, then you should be following what's in your handbook because if not, you can get hung out to dry with it.
Factoring in states that are more advantageous than others
What I want to tell you is that with the process of counting the costs, I hope that you're doing this with the experts and advisors that you've surrounded yourself with because there are some states that are more advantageous to be in than others. We have team members across several states, but we’re not looking to venture into other states unless there is a phenomenal hire that we just absolutely cannot refuse to bring on board.
What “Nexus” means and the types of Nexus
Nexus is just basically a fancy word that helps in trying to determine, at a state level, if you exist in the state and if you have responsibilities to pay tax in the state. With building a team across states, you now have a physical presence in that state; it becomes a physical nexus that you have to be aware of.
There are three types of Nexus:
States with no personal income tax
At the time of writing this post in September 2022, there are just seven states remaining where there is no personal income tax. Now that doesn't mean there's no corporate income tax, it just means no personal income tax.
- South Dakota
Why partnership is important in your business
Having the right partner is so important because there's so much to know and navigate when it comes to making critical decisions in your business. If you're not talking to your partners, they are not helping you because they don't know what's happening day to day in your business.
The more you withhold from a partner that you're working with, the less helpful your partner is actually going to be for you, especially in the area of payroll. And this is something you want to get right.
If you want to learn more about building a team across multiple states, check out Episode 103: What To Know & Understand About Building a Team Across Multiple States .