How to Navigate Multistate Payroll & Sales Tax Obligations

Becky Byrd

Mar 15, 2022

When it comes to paying taxes, the first question that comes to mind is usually how much do I owe?

But for a growing number of small and mid-size business owners, the most frustrating tax question is not how much they will owe in taxes but where exactly do I owe them?

The answer can be far from straightforward. As many growing businesses discover first-hand, when an expansion, acquisition or a new market puts an enterprise across state lines, paying taxes can get a lot more complicated.

For some business owners, the introduction to the complexities of multistate payroll taxation came with the pandemic-driven transition to a remote workforce. When your employees no longer report to a central office regularly, your tax obligations can shift.

Remote Workers & Remote Tax Obligations

State income tax withholding, workers’ compensation and unemployment payroll taxes can change when employees are working in a different state. There may be local jurisdictions that impose additional obligations as well. But while it’s an added complication, there is also opportunity to recruit across boundaries, especially in a tight job market. It can be well worth the effort of taking the taxes on.

Multijurisdictional payroll obligations are generally easier to determine than other types of taxes. If an employee shifts to an out-of-office work location in a different state, the employer who withholds taxes for that employee may have to determine how to apportion withholding.

In most states, the employer will be required to obtain a payroll account for the employee, which may require registration with the secretary of state – and may require the services of a registered agent. Such registration could potentially trigger additional obligations like sales or income taxes if it is determined that the business has a “nexus” or a taxable connection to the state.

Sales and income tax compliance is far more complicated than payroll, where the starting point – where is the employee working? – is a relatively easy determination.

Multistate Sales & Income Taxes

Sales and income tax compliance is complicated by the fact that states often have different thresholds for how the obligation is established. There are also different rules for which services are subject to sales tax. If this sounds confusing, it’s because it is – and it can get even more tangled for industries like construction where goods and services are frequently bought and sold across states with different requirements and exemptions.

You may be subject to new sales or income taxes when your business grows across state lines – obligations that are often not easy to determine. If your business regularly crosses boundaries, like the tri-state Kentucky-Ohio-Indiana area, you may be subject to neighboring state taxation.

How to Get Multistate Tax Help

How do you take advantage of multistate opportunities without running afoul of multistate compliance headaches?

You can do your own research and ask a lot of questions but partnering with an accounting firm that provides multistate tax advisory services can save you a lot of time, headache, and minimize the risk of non-compliance.

At Kirsch CPA Group, we specialize in forward-thinking and holistic accounting and business advisory services. That means we know the business of our clients from border to border – a distinct advantage when it comes to determining multistate tax obligations and assessing the risk of compliance-related headaches. Key questions include:

Are you required to register in a state where you do some business or where some of your employees work remotely?
Are there unique local taxes due in a place where you have a storefront, some equipment or some other business connection?
Will you trigger a tax obligation if your employees are required to obtain a permit, license or registration from another state?
In what jurisdictions and to what degree are you required to report your sales?

Finding and implementing the right tax strategies for your growing business is an increasingly complex journey, but with the right partner and the right approach, you can reap the upside of multistate growth and recruiting opportunities.

At Kirsch CPA Group, our accounting and advisory services help you identify which KPIs will light your path, create forward-looking strategies, and move you forward to your goals.