Working Out-of-State? What You Need To Know.

Seeking work in other states has evolved from a strategic maneuver into an outright necessity for some companies. While compliance and tax reporting never comes to mind first when trying to obtain out-of-state work, it is an important aspect nonetheless.

Wherever you travel to perform work, you must adhere to the guidelines and requirements of that specific state. These requirements range from state to state, with some being similar while others are vastly different. Generally speaking, there are three issues that each company must consider before taking its business to a particular state:

1. Registering to do business in that state
2. Obtaining the required certifications
3. Tax reporting and compliance

1. General Business Registration

Any entity wishing to do business in a state must first obtain the authority to transact business in that state In Maryland, this is governed by the State Department of Assessments and Taxation, which manages matters such as annual entity registrations and renewals, and declaration of registered agent.

In other states, business registration is typically a function of the Secretary of State. Most states have a portal which discusses how to do business in that particular state, and will direct you to the website for the Secretary of State where you can obtain the proper registration forms. Be aware, out-of-state businesses may be referred to as “foreign” entities and required to complete a “foreign” authority to transact business.

The fee for this application varies from state to state. Doing business in Louisiana for example, may require a $100 fee compared to a $225 fee in New York. Many states also have fees for naming a registered agent, changing information with the state, or withdrawing from the state.

Another requirement is to register for general business taxes such as sales, use, and withholding. States attempt to simplify this process by arranging for one registration to cover multiple taxes. Typically, this is done via the Internet for that state’s Department of Revenue.

2. Contractor Licensure

The licensing requirement to do specific types of work in different states varies significantly. Most states have at least a minimum requirement. An example would be specialty contractors, which are frequently required to apply for a license no matter which state they wish to operate in. Licenses typically are reviewed annually, with the exam required only for the initial license.

3. Tax Compliance

Lastly, and perhaps most importantly, are the tax requirements imposed by each state. There are several questions that need to be asked before deciding where to pursue business.

• What are the tax rates?
• Is the tax applied at an entity level or an individual level?
• If the tax is applied at an individual level, do the company owners need to start filing a return in that state, or can a composite return be filed to allow the company to pay the tax on behalf of all the owners?
• How complex is the recordkeeping that is required, and is your company ready for such an undertaking?

Local income taxes can sometimes be overlooked. Often these taxes have rates of only 1-2%, but not taking these taxes into account before accepting a job can significantly erode your profit margins. For instance, in Pennsylvania, most cities and townships, large or small, have some form of local income tax. This substantially differs from Maryland, where only counties levy a local tax.

Payroll tax compliance is another consideration. You must register your business for state unemployment tax in the new state you are entering. You must also assess what your requirements and obligations are in terms of collecting and remitting state withholding taxes from your employees’ payroll checks.

In general, you must withhold state taxes from employees and remit to the state in which you are working. However, Maryland is part of a reciprocity agreement with other Mid-Atlantic states, including Pennsylvania, Virginia, West Virginia and District of Columbia. Under this agreement, companies located in any of these states are not required to withhold state income taxes from employees that live in one of the other states.

Planning Ahead

This article mentions only a few of the several aspects to performing services out of state. Understanding all of the relevant factors and obstacles involved can make your out-of-state operations more profitable, while helping you avoid some of the pitfalls that are inherent in this type of strategy. It is important to know your responsibilities as a company prior to starting a job, rather than “figuring it out later.”

Consult your accounting professional during the planning stage of bidding projects. Being proactive instead of reactive will not only make your life easier, but will help your bottom line.

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Article Provided By Wayne Baldwin, CPA, MKS&H Principal, A&A Services

About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs. Please visit www.MKSH.com for more information.