Managing State and Local Employee Tax Compliance Complexities

By Guest Author | 01/11/2024 | 6 min read

Today’s workforce increasingly embraces remote flexibility. Already gaining traction before the COVID-19 pandemic, working from wherever they want is becoming an expected benefit of today’s workforce. Many have jettisoned their residences for new digs across state lines. Done right, it’s a proven recipe for increased productivity, heightened employee morale, and improved worker retention. But it also results in challenges for CPA firms managing payroll for clients with employees scattered across the map.

Consider a CPA firm with an employer client based in Oklahoma, which has varied income tax rates, which employs staff in Texas without income tax. Another scenario unfolds in Nevada, known for its straightforward payroll processes, paying workers who live in California, a state notorious for its intricate payroll regulations.

Enter IRIS payroll solutions that offers a comprehensive set of tools designed to seamlessly navigate the intricacies of state-specific and even hyper-local payroll requirements. Whether streamlining your in-house payroll processes for out-of-state employees or selectively outsourcing payroll services to tackle complexities in specific regions, IRIS is a strategic ally that empowers CPA firms to manage diverse and constantly changing payroll tax scenarios efficiently.

At the helm is Tax and HCM Compliance Specialist Loreene Kemperman. She outlines three top examples of areas with complex and evolving situations that CPAs encounter with their payroll clients.

Alabama’s New Overtime Exemption

Starting Jan. 1, 2024, hourly paid employees in Alabama will not pay state income tax on their overtime pay – a legislative move that essentially gives hourly employees a 5-percent pay raise (the state income tax rate), but also creates new administrative and reporting requirements for employers. Passed in June, it aimed to provide tax relief for Alabama hourly workers dealing with high inflation and provide a competitive advantage for state employers when hiring new workers. The law currently applies only to overtime paid before June 30, 2025, though there is talk that the state legislature may extend the law before that date. Unless the law is extended, any overtime pay earned before June 30, 2025, which is not paid until after that date, will still be subject to taxation.

“Alabama is the first state to enact such a law, but four other states, including the Carolinas, are considering it,” Kemperman says. “It’s already on their dockets to discuss in their next legislative sessions. That’s a potential challenge for someone working outside of a payroll system to calculate, but the IRIS software systems are already being set up to handle that.”

Ohio’s school district and economic zone taxes

“Ohio is another complicated state,” Kemperman says, noting taxation based on school districts and economic zones. “Wherever you happen to be living on a given pay date, that's where you are supposed to pay those school zone taxes. If you move every week, you could have 52 different school districts that you're paying taxes to. That obviously doesn't happen, but our systems are set up for it.”

Ohio also requires tax withholding and payments based on joint economic zones where employees live. These zones can be massive, such as those supporting the Toledo Express Airport, or surprisingly small.

“The smallest of Ohio’s joint economic districts is one created solely to pay for regular cleanup of the on-ramp and exit ramp to the interstate,” Kemperman says. “There are four manufacturing facilities in an industrial park that uses those ramps. If you work at one of those four facilities, you’re liable to pay the tax to keep them clean.”

IRIS currently has all the various school and economic zone tax information, as well as all other applicable taxes, loaded into its payroll platforms so it’s easy to identify, assign and calculate the correct rates for employees living in each of the individual and overlapping jurisdictions and make changes when an employee moves. But things will get even more accessible soon. In early 2024, IRIS will launch a new feature with a direct connection to a third-party geo-tracking provider. Once implemented, an employer will enter an employee’s address and receive an automatic reply listing every tax jurisdiction and requirement applicable to that address.

State-level paid family medical leave

Private employers with 50 or more workers surely are aware of the federal Family Medical Leave Act (FMLA), which provides up to 12 weeks of unpaid leave during a 12-month period for employees to care for newborns, adopted or foster children or an ill family member, or to address their own serious medical health condition. But the act also allows states to expand benefits. Driven in part by the COVID-19 pandemic, states are increasingly implementing or considering it. So far, 11 states - California, Colorado, Connecticut, Delaware, Massachusetts, Maryland, New Jersey, New York, Oregon, Rhode Island, Washington, and the District of Columbia - all currently offer paid family and medical leave funded through employee-paid payroll taxes and/or employer-paid payroll taxes. Multiple states also offer additional levels of paid sick leave, parental leave, and even school leave, which allows for a limited number of hours annually for parents to attend school-related events and activities for their children.

“Each state does it a little differently,” Kemperman says. “Generally, these programs start taking deductions from employees a year to 18 months before the program can pay out. At that point, it becomes akin to an insurance pool of money available to employees to use if they need to take time off. It’s similar to short-term disability in that an employee will still get paid, though perhaps not at their full salary.”

“IRIS has facilitated most of these states in their systems and is steadily working to develop setups for states with newer legislation.”

So how does IRIS keep up with all the new, in-the-pipeline, and potential legislation affecting employer and employee taxes?

“I am tapped into numerous resources and I get a constant bombardment of information including legal summaries at every stage of a legislative process,” explains Kemperman. “I am also a member of several national payroll organizations and networks specific to payroll and tax processing, even boasting subgroups dedicated to local taxes. We keep each other informed.”

Savvy employer clients can also assist in the process, sending a heads-up the moment they get wind of a legislative movement in their areas.

“Nine times out of 10, I'm ahead of that,” Kemperman says. “By the time the support department messages me, ‘Such-and-such a company just found out about a new PFML program. Are we ready for this?’ I'm able to say, ‘Yeah, it's in queue and we'll have it developed in time for go-live.’”

CPA firms can call upon IRIS to manage their entire roster of clients or a select few with particularly complicated requirements. As Kemperman established, the IRIS payroll software platforms are constantly updated to handle all new state payroll and tax requirements, but if you want to outsource those employees living in tricky states, our payroll-managed services can take care of those employees, too.