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Efficient Strategies for Compensating Employees in Multiple States

Defining a multi-state payroll, how much compensation costs employers, compensation strategies, understanding source income, reciprocity, nexus, taxes.  

Companies must maintain a multi-state payroll if they have business locations in different states or remote employees from other states. If their location is near the border of two states and workers must travel from other states, they are also subject to multi-state payroll. 

If a company operates in 15 states, it must determine the taxes in each one accurately and withhold them for all its employees. You can handle multi-state payroll effectively with the use of online payroll services and an understanding of the requirements.

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Employer costs for compensation 

In December 2023, the employer cost for civilian worker compensation was $45.42 per hour on average, data from the US Bureau of Labor Statistics shows. Salaries and wages were $31.29 on average, and benefits – just over $14. In the private sector, the employer compensation cost for employees per hour was $43.11 on average. The hourly average for salaries and wages was $30.33 and comprised more than 70% of employer costs, while benefit costs accounted for the remainder, coming to $12.77 an hour worked on average.  

Strategies for compensating employees 

Developing an efficient compensation strategy starts with an in-depth market and cost of living analysis, research into salary ranges, and setting unambiguous policies for remote work.   

Conduct a thorough market analysis for each state to understand the prevailing compensation rates for similar roles. Consider factors like industry standards, geographic location, and demand-supply dynamics.

The cost of living affects your business budget, office space expenses, salary expectations, and the prices of products and services. You adjust for cost-of-living differences between states by lowering or increasing base salaries, considering factors like housing costs, utilities, transportation, and taxes. As of 2023, Mississippi had the lowest cost of living, and California had the highest. 

Establish salary bands or ranges for different roles based on market research. This provides flexibility while ensuring fairness across locations. Adjust the ranges according to the competitive landscape in each state.

In 2024, more people are working remotely than ever. Determine whether compensation will be based on the employee’s location or the company’s headquarters.

Offer bonuses or incentives tailored to specific states to attract and retain talent. These could include signing bonuses, retention bonuses, or performance-based incentives aligned with regional goals.

Review and adjust healthcare plans, retirement contributions, and other benefits to accommodate differences in state regulations and market preferences.

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Source income, reciprocity, nexus, and taxes  

According to the source income principle, the state where the employee earned their wages or otherwise sourced income taxes this income. It doesn’t matter where the employee lives. 

Reciprocity agreements

A reciprocity agreement is reached to avoid double taxation. It is an exception to the above principle, where employers may withhold taxes only from the state where the employee lives. In January 2023, 17 states had reciprocity agreements. They usually apply to neighboring states, but not always. Illinois has agreements with Michigan, Kentucky, Iowa, and Wisconsin but not with Missouri and Indiana. 

If someone lives in Michigan but works in Illinois, the company can only withhold taxes in Michigan. However, let’s say the person lives in Indiana. In this case, the employer must consider the tax requirements and laws of Indiana and Illinois. To add to the complexity, you might have employees who work in different states all year round. Consulting with an experienced payroll provider is highly recommended.

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Nexus

A nexus is a business’s connection with or presence in a given state. This can be in the form of an office, warehouse, or another physical location. Sales and employee travel can create a nexus, as can employees who perform e-commerce sales or work remotely from their state.

To ensure compliance, multi-state companies must know their nexus status in all states where they do business. 

Taxes

Employers must take state income tax out of their employees’ wages or salaries and remit the money to the state. The states of Florida, Alaska, Wyoming, New Hampshire, South Dakota, Washington, Tennessee, Nevada, and Texas don’t have a state income tax.

States like Connecticut and Massachusetts mandate employers to deduct medical and family leave contributions from their employees’ paychecks. 

Recap

  • What is a multi-state payroll
  • Understanding compensation costs for companies 
  • Crafting efficient compensation strategies
  • Source income
  • Reciprocity agreements 
  • Business nexus
  • Withholding state income tax

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