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Outside Employees
Taxes, insurance, and local laws for non-907 staff
By Terri Marshall
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laska businesses have out-of-state workers on the payroll for any number of reasons. For instance, a company might need certain expertise that is not available from a resident of the 49th State. Or a resident might move away while remaining on staff.

Outside employees make up a subset of remote workers. According to the US Census Bureau, the number of people working remotely tripled between 2019 and 2021 to 17.9 percent of the workforce. By the end of 2024, roughly one in five American workers were still signing in from home, with one in ten working remotely full-time, according to a Stacker analysis of federal survey data.

Employing a resident of another state must be worth the added complications. For businesses—especially the tax and payroll departments—the rapid increase in worker mobility across multiple states (and even countries) has brought new compliance risks, expanded tax liabilities, and additional reporting requirements.

According to an online survey by KPMG and PayrollOrg of 610 United States tax and payroll professionals, just 26 percent felt like they had a “full handle on all potential state payroll reporting and withholding requirements.” However, four out of five of those surveyed indicated their companies were now fully committed to hybrid work arrangements, with some of their staff members residing out of state. Half of the companies reported challenges of having to file payroll taxes in other states despite not having payroll reporting systems necessary to manage a scattered workforce.

Assuming the remote working trend will continue to expand, Alaska business owners have many things to consider when hiring a remote worker who lives outside of the state.

Considerations for Employers
“Whenever employers hire remote workers, there are a number of payroll tax considerations both in the employer-based state and the state of residence where the employee will be living/working,” says Julie Schrecengost, tax partner and Anchorage office tax leader at KPMG. “Having a remote worker for an Alaska-based business should require the Alaska employer to register for state income tax withholding and state unemployment taxes in the remote worker resident state. Depending on the state and locality, there may also be local payroll tax implications (for example: withholding, OPT [occupational privilege tax], payroll tax expense, et cetera).”

Beyond payroll taxes, Schrecengost points to other considerations: “Workers’ compensation, disability insurance, and paid family medical leave requirements in the remote worker’s resident state. Lastly, hiring remote workers in new states could cause entity-level taxation that should be considered prior to hiring the individual.”

Because each state has its own laws and regulations, it is important to stay current on which taxes employers must withhold and pay, which mandated benefits employers must provide, and any other obligations. Additionally, each state has its own taxing authority, which means employers must register with the appropriate agencies in each state and go through the necessary steps and fees to get an ID number to withhold and remit taxes for remote employees.

“Whenever employers hire remote workers, there are a number of payroll tax considerations both in the employer-based state and the state of residence where the employee will be living/working.”
Julie Schrecengost
Anchorage Tax Practice Leader – Partner
KPMG
“The most questions or concerns we see around hiring remote workers is the additional compliance burden and complexity for payroll tax compliance. In addition, if the remote worker were to perform services remotely but not from their primary residence (e.g., live in Washington but go to California to work for two weeks), it could require additional wage sourcing and withholding in those additional states as well,” says Schrecengost. “Remote workers could also work outside of the United States, which can cause entity level and payroll taxation in countries outside of the United States.”
Compliance Concerns
Arranging proper payroll deductions for taxes and benefits represents only a fraction of the concerns business owners need to address when it comes to remote work policies. “For business owners to ensure compliance with remote work policies, a structured approach is key,” advises John Montgomery, tax partner for global mobility services at KPMG. “Start by identifying which roles can be performed remotely and whether any create regulatory or security risks. Evaluate locations—both where employees live and where they request to work—factoring in tax, labor laws, and company presence.”

Each state has its own rules and regulations regarding state unemployment taxes. Typically, state unemployment taxes are paid to the state where the employee is working. Each state sets its own rates and wage base, requiring business owners to register for an account with the unemployment agency in that state.

Another consideration is local income taxes, which are collected in various localities across many states. For example, if a remote worker chooses to work from New York City, they are required to pay a city income tax, and the employer will be responsible for withholding those taxes.

For workers’ compensation, employers may need to include additional states in their policy. When an employee works from home, determining if an injury is work-related can be challenging. It’s best to discuss the incident with the employee and document details before filing a claim. Additionally, having remote workers maintain a dedicated workspace and set working hours helps distinguish between work and personal activities

Group health insurance plans and benefits are also regulated by state law, with the exception of self-funded and level-funded benefit plans. Staying current on healthcare and benefits requirements in each state where you have remote workers is essential for compliance.

The same holds true for employment laws that impact employees, including employee leave, minimum wage, and overtime.

Managing Moving Parts
Montgomery uses the following checklist as a guide for addressing compliance issues businesses need to consider regarding remote workers.
Role Assessment
  • Identify which roles can be performed remotely or in a hybrid setting.
  • Assess roles that present higher compliance or security risks and determine flexibility accordingly.
Location Considerations
  • Map out locations where the company has an employee presence.
  • Review employee requests for remote work in new locations.
  • Evaluate risks and legal implications of remote work in each location before granting approval.
Regulatory and Policy Compliance
  • Define clear guidelines for roles subject to regulatory constraints.
  • Establish IT and cybersecurity policies to protect company data.
  • Ensure tax, labor law, and business registration compliance for remote workers in different jurisdictions.
Work Duration and Presence Guidelines
  • Set limits on how long an employee can work remotely away from their primary work location.
  • Establish rules for employees working in locations where the company does not have a legal presence.
Compensation and Benefits
  • Align compensation with the employee’s work location or business unit requirements.
  • Create exceptions for regulated roles where pay is based on job location rather than residence.
Expense and Travel Policies
  • Define a uniform reimbursement or stipend policy for home office setups.
  • Establish clear travel and expense policies based on different categories of remote work.

“Employers should establish clear policies on work duration, compensation alignment (with carve-outs for regulated roles), and expense reimbursements for home office setups,” says Montgomery. “Additionally, IT and cybersecurity policies should be reinforced, and travel and expense guidelines standardized for different remote work categories. By proactively addressing these factors, businesses can maintain flexibility while ensuring compliance and operational efficiency.”

Final considerations noted in the aforementioned survey by KPMG Employment Tax practice and PayrollOrg centered around questions of employee privacy and properly investing in the additional tax and payroll infrastructure required to support a mobile workforce.

Regarding privacy concerns, the responding companies were sensitive to the downside of tracking employee locations through digital tools or restricting where they can work. However, they were equally concerned about the potential risks of non-compliance if remote workers failed to keep businesses informed of their location. Notably, 74 percent of the respondents indicated that their remote work procedures were “still a work in progress,” showing an acceptance of remote work’s permanence.

Whether keeping a former Alaskan on the team or hiring an Outside expert, employers routinely look beyond state borders to fill a staffing need. The burden of following an extra state’s compliance rules can be worth the effort.

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