A while back, Ian wrote about how to hire your first employee. It was a popular post and we’ve had requests for more tips on starting and running a small business. And why not? It’s a tough thing to do, and UserScape has been thriving for over a decade now. Ian and Jamie (our cofounder and the other half of the Landsman Dream Team) must be doing something right!
Jamie’s in charge of Operations around here, which means she runs the show behind the scenes; she knows about taxes and payroll and HR and, you know…how to run a business.
She’s agreed to write a series of posts for us about running a small business, and this is the beginning of that series.
Why Remote Employees?
UserScape is a fully distributed company; at the moment, our staff of 7 is located in 6 different states, from New York (Ian & Jamie) all the way to California (that’s me!), with stops in Connecticut, Arkansas, North Carolina, and Tennessee. Managing a distributed team has its own set of unique complications, but Jamie’s got it down to a science.
But don’t take my word for it. Here she is with her bad self:
How To Hire Remote Employees
by Jamie Landsman
After reviewing a pile of resumes you found the perfect person to join your team. The rub: they live outside the state in which your business is incorporated. No need to fret—but there are a few considerations that will impact the steps you take to hiring your new team member.
Nexus, the root of all evil.
OK, maybe it’s not evil (I get that states need the revenue and such) but the concept of nexus can be confusing, and it’s important you understand what it is and how it will impact your business as you move into a new state.
In short: Nexus, with respect to tax law, is the presence a company has within a state.
A nexus in general means a connection. The term nexus is used in tax law to describe a situation in which a business has a “nexus” or presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state. Nexus describes the amount and degree of business activity that must be present before a state can tax an entity’s income. If a taxpayer has nexus in a particular state, the taxpayer must pay and collect/remit taxes in that state.
In many states, nexus is typically determined through a separate set of criteria for State Income, Withholding, and Sales Taxes. A company maybe subject to Income and Withholding taxes for the state but not Sales Tax. This determination is typically made at the governing tax entity level.
However generally speaking nexus (of all tax types) is determined by one or more the following criteria being met:
- company has physical presence within a state
- company employs a resident of the state
- company solicits business within the state
OK, now what?
Not deterred, you find someone you want to hire who is outside your state (outside the U.S. is outside the scope of this article) but aren’t sure how to proceed. Here are the basic steps UserScape has followed when onboarding each of our 5 out-of-state employees.
This process could vary somewhat by company and state so be sure to check with your accountant first.
Hire a payroll provider.
Once you start hiring, especially when that employee is outside your incorporated state, you’ll want to use a payroll provider. While there is a cost, a payroll provider will ensure the proper witholding taxes for all jurisdiction you’re in are collected and filed timely. You could do this yourself but you would be a crazy fool to do so. You’ll have to devote excess time to staying on top withholding tax changes and filing deadlines and you’ll still screw it up and open yourself for a potential audit. Not worth it. FEE: Varies wildly.
Hire a Registered Agent.
This one is totally crazy, makes no sense for modern economies, and is a hold over from the good old days; but you still have to do it. Once you hire in a state (i.e., establish a presence), you need a physical location. Every single state entity you deal with will want your physical address in the state. Some for mail purposes and others just to have your location in the state on record. Clearly, you don’t want to give your employees’ home address on government forms. So, there are companies that specialize in being the local address for companies like yours. They will provide you with a physical address in any state you need. They will forward any mail you receive at that address on to your home state. Nuts, yes, but necessary. Warning, these RA companies are a bit shady seeming (think some domain name companies); I suggest starting with your accountant. Most accountants should be able to recommend one their clients work with. FEE: $125 annual/per state.
Register with Secretary of State.
You can think of hiring an employee in another state like starting a new business. First stop in the state is the Secretary of State. This will register your business in the state. Typically you must provide info like: business name (if another business is already using that name, you’ll have to change it to something else), local address (thank you very much Registered Agent!), Federal Tax ID, and Officer information. Once you’re approved, they will issue you a business ID. It’s with this ID that you can continue on to the next entities. FEE: $300 annual.
Register with Department of Labor for unemployment withholding ID.
This is usually a simple form with no upfront cost. As soon as your unemployment withholding ID is received, you need to pass it on to your payroll provider so they can file returns on your behalf. No worries if you don’t get this number before Employee #1 starts. Payroll providers know all the tax tables for every jurisdiction so they can start withholding on day 1. They can also file the withholding return (typically quarterly) in an “applied for status” and start using your ID number when you get it. However, don’t hold off because your payroll provider charges an extra fee for this service! So save yourself money and headache and just get the withholding ID number as part of your new hire process.
Register for Sales and Use Tax.
My personal favorite because it varies so from state to state. Most states are now wise to this revenue stream and are happy to take your money but know that in many states, tax code states that unless you are delivering a good/service (digital or physical), you are not subject to collecting/paying sales tax. Translation: all you SaaS people are most likely off the hook. Anyone with downloadable/self-hosted software is stuck collecting sales tax in the state just like the local deli and auto body shop. In any event, all companies should go through the process of registering. After a series of questions, the state Department of Revenue will determine whether or not your company is subject to collecting. If the determination is made you are, like Snappy Helpdesk, congratulations! You now have the task of integrating sales tax tables into your front end store and building back end reporting for filings that can range for monthly to year (depending on state). The nuts and bolts on this one alone could be a separate discussion. For another day, on we proceed!
Understand any local tax jurisdiction.
Our first hire was in Louisville, KY. We were unaware that the city of Louisville had its own sales tax and withholding tax process. Paying fees that were more than the taxes taught us a valuable lesson: Always ask the Department of Labor, payroll provider and State Department of Revenue (typical governing body for Sales & Use Tax) if there’s a local withholding/tax.
Once through these steps, you’ll have all the work done with the various government entities to establish your out-of-state new hire. Congrats!
What’s next? Now you need to start thinking about benefits, time off policies, expense procedures…Subscribe now to be sure you don’t miss out on the next installment of Jamie’s Small Biz Operations series!
Questions, comments, advice? Please share in the comments section!
What other small business problems can Jamie help you with? Let us know!
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