By Anna Baumgardner, CPA | Published 06/17/2022
Whether you are looking to expand your team or are simply hiring staff due to natural turnover, working and hiring remotely is becoming popular. Hiring remote employees allows you to expand your talent search and find the best fit for the organization, but some hiring managers worry that hiring an out-of-state employee will cause hassle for the organization simply because they are in another state. In this discussion, we present the implications of hiring out-of-state employees for nonprofit organizations.
Secretary of State & Charitable Solicitation Registration
Most (but not all) states require registration with the Secretary of State (SOS) in any state where an employee is living and working, so that the proper payroll tax accounts can be set up. This applies to nonprofits as well as for-profits. Speak with your legal counsel or check with the SOS website to determine if the new state requires an SOS registration, and learn how to register where required.
Charitable Solicitation Registration
Just because a nonprofit is required to register with the SOS for payroll tax purposes does not mean that they are required to file a new charitable solicitation registration. A charitable solicitation registration is only required in the states where donors are located. So, hiring an out-of-state employee does not trigger charitable solicitation registration in that state unless the new employee is starting a new solicitation campaign there, as well.
Payroll Taxes & Insurance
Payroll Tax Accounts
After registering with the SOS, you need to register for all of the payroll tax accounts applicable to that employee’s state. This usually includes state income taxes and local jurisdiction taxes, if any are imposed. Do this by visiting the state’s Department of Revenue, and locating the State Income Tax registration. Note that some states have reciprocity agreements between each other – such as DC, MD, and VA – which may reduce the burden of setting up and new payroll tax accounts; any reciprocity agreements should be noted on the DOR website.
State Unemployment Insurance
You’ll also need to register for State Unemployment Insurance (SUI). This is typically handled by the state’s Department of Labor or Workforce Department. Visit the state’s DOL or equivalent website to find and register for this tax account. If there are any local jurisdictions which impose a tax on your new employee, they will usually be identified here as well.
Other Requirements – WC, Disability with the State, etc
Depending on the state, you may also be required to register for state unemployment insurance, and state Family Leave and Disability. State Family Leave and Disability, when required, is frequently administered by the Department of Labor alongside the State Unemployment Insurance and is identified when registering for SUI. The registration process is often concurrent for SUI and Family Leave, to streamline the applications and reduce confusion among accounts.
You will also need to update your worker’s compensation policy to include the new state. Of the 50 US states, 46 allow you to purchase worker’s compensation insurance through private providers. Your payroll service provider or your liability/board of director insurance provider may be able to guide you to or directly provide private worker’s compensation insurance in those 46 states. The remaining four – North Dakota, Ohio, Washington state, and Wyoming – are “monopolistic” states, meaning that you must purchase worker’s compensation insurance through their government system. Often, those states’ worker’s compensation insurance is administered by the State Department of Labor, and the application for worker’s compensation is included with SUI registration.
Once you have the account numbers for your newly registered state income tax, unemployment insurance, any local taxes, and any state-administered insurance, you will need to provide those account numbers to your payroll tax service provider so that they can collect and remit the taxes.
Do I have to do all of this manually… myself?
Instead of doing all the legwork yourself, you may be able to have a third party such as CorpNet (Gusto’s partner) register and set up your payroll tax accounts on your behalf. There are pros and cons to hiring out this service: the information is transmitted directly to your payroll service provider, and they will not keep asking you for registration/account numbers that are not yet available. But, sometimes their team is short-staffed, or not well trained, and the process may take longer than necessary and leave you out of the loop. If you want to consider having a third-party partner assist with tax account registrations, we recommend scoping out their average turnaround so that you get a feel for their efficiency. The entire process should take no more than three weeks, but is frequently faster if the state agency is responsive and the process can be completed entirely online.
UBIT/Sales Tax Implications
Owners of nonprofits and for-profits alike are frequently concerned about hiring employees from other states because they are worried that the employee will create nexus for tax purposes. Fortunately, hiring an out-of-state employee does not automatically create nexus for nonprofits, due to the nature of the few taxes which are applicable to nonprofit organizations.
Nonprofits who are subject to sales tax only incur sales tax in a new state if they open a new location. For example, a nonprofit that collects and remits sales tax on goods sold in a gift shop only pays sales tax to the state/jurisdiction where they are making sales. Hiring a new program manager in another state does not create a new state sales tax, but opening a new gift shop in another state would.
Unrelated Business Income Tax – generally avoided by nonprofits – is also only applicable to states where unrelated business income is earned. When filing their 990, a nonprofit organization with UBIT only files a return in the state(s) where they are earning non-mission-related income. Thus, hiring an out-of-state employee does not create new UBIT, unless the new employee initiates an unrelated business activity.
Finally, you can sue a PEO (Professional Employer Organization) like Justworks to serve as your HR department, which puts the registrations discussed above on the PEO instead of on you.
Hiring a remote, out-of-state employee should have very little impact on your nonprofit other than the initial state registration if applicable, payroll tax account setup, and the expanded knowledge that team member brings to the organization. For most nonprofits, the little bit of extra legwork at onboarding is worth having the right employee on the team – even if they do not share the same state.