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Hiring Out of State Employees: PEO Service vs Employer of Record

Many US companies hire and manage employees who may reside in another state, and aside from obvious management challenges, there is always the question of how to fulfill the requirements of each state’s employee registration and withholding laws.  As with any situation that involves meeting multi-jurisdiction compliance rules, there are several approaches available. Unless a company has the resources and expertise for a DIY option, either a PEO or an employer of record solution may be the best alternative.

General Requirements for Out of State Employees

Basically, if you hire employees out of state you need to take the following steps to comply with the rules from the employee’s state of residence:

  1. Physically check their eligibility with an I-9 form, which means you have to inspect their eligibility documents in person, or through an authorized representative.
  1. Check what the employment and unemployment requirements are for those states to make sure you are compliant.
  1. Check what document storage and retention requirements may apply to employment files in those relevant states.
  1. Make state employer contributions in that state (for which you’ll need an Employment Security Reference Number that you get from registering with the ESD – Employment Security Department). You may need to apply to be a Foreign Limited Liability Company – which may also require you to nominate someone in that state with a physical address who can be contacted as the legal representative of your company. Determine if you need a Certificate of Existence or Certificate of Good Standing from your home state, and register with the state Department of Revenue (DOR),
  1. Apply for a business license.
  1. You also have a statutory requirement to report any new hires to the relevant state authority within 20 days of the hire occurring.
  1. Depending on the state you might also have to physically post certain notifications or posters in the workplace as per state regulations.
  1. Research tax withholding requirements: state unemployment tax, workers compensation insurance, B&O taxes and apportionment use tax.
  1. It is also possible that having an employee in another state might be considered to be the operation of a business. This could incur corporation tax or franchise tax.
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Some of the questions that may arise for a company doing this on their own include:

  • What are the methods available for supplying information, such as online forms and applications?
  • Is it necessary to use an accountant or lawyer for any of the steps?
  • What are the upfront and ongoing administrative costs?
  • In which state do you pay taxes for employees – your business residence or their home residence?
  • How will this ongoing process affect the business in terms of resources, time and cost?
  • How will using a PEO or employer of record service mitigate these costs and handle these requirements?

Given the importance of these questions, it may be useful to consider alternatives that do not require the extensive research and time a DIY approach takes.

The PEO Solution vs. Employer of Record Service

The DIY approach to out-of-state employment has many challenges for a company, with no way to minimize the requirements in each state. One easy method to avoid implementing all of these steps is to utilize a PEO (Professional Employment Organization) service to handle it. This may be especially useful for small to medium-size businesses.

According to a recent white paper report: “Most PEO clients are small to mid-size companies. The average number of employees among PEO clients is less than 10. Organizations of this size usually have only a “bare bones” HR functionality, which typically focuses on the most basic HR needs: hiring employees, getting them paid on time, and navigating the complex world of taxation (including FICA and FUTA) and other compliance requirements in an accurate and timely manner.” 

The alternative is a GEO service, which essentially supplies an ‘employer of record’ (EOR) in the employee’s state, and the following section illustrates the differences between a DIY, PEO, and EOR approach.

1. Employer Relationship

DIY:  The company must run payroll in multiple states, meet all statutory requirements and fulfill employer responsibilities.

PEO:  The PEO becomes a ‘co-employer’ along with the client, meaning liability and responsibilities still rest with the client.

As a rule, PEOs do not supply labor to worksites. They ‘co-employ’ existing permanent employees and provide services to both the worksite employer and the employees. Also, the PEO does not take responsibility for reporting unemployment claims for the client.

EOR:  Employees become fully employed by the employer of record, along with all responsibilities.

2. Insurance

DIY:  Insurance must be researched and provided to employees, including healthcare and worker’s compensation.

PEO:  Some insurance is provided but has to be opted into and paid for in addition to service costs. The client still needs to carry their own insurance for protection as a co-employer.

It may be difficult for PEOs to get workers comp insurance for non-clerical industries. This often becomes the client’s responsibility.

EOR:  Agency and client become protected from risks such as litigation and compliance matters related to the employment of the employee.  The employer of record’s insurance covers the employee fully, including General Liability, Professional Indemnity and Workers Compensation.  The employer of record is compliant with healthcare reforms and offers medical plans to its employees on behalf of its client

3. Employment Contracts

DIY:  The company must directly negotiate and draft all employment contracts for each individual employee.

PEO:  The employment contract is with the client, not with the PEO.

EOR:  The employment contract is between the employee and ‘employer of record’, with a service agreement between ‘employer of record’ and the agency/client

4. Company Registration

DIY:  Company handles all state registrations on its own, which may require local representatives or professional assistance.

PEO: The client is still required to register their company in every state/province where they wish to have employees or conduct business.

EOR:  Using an employer of record means you don’t need to register in multiple states as they are set up already across all states.

5. Statutory Requirements

DIY:  The company carries all risks of statutory compliance, and may require legal counsel to ensure that all requirements are met.

PEO:  The PEO transfers all risk to the client including Fair Labor Standards (FLSA), Family and Medical Leave Act (FMLA), Americans with Disabilities Act (ADA), state and local requirements.

EOR:  All the risks are carried by the employer of record, such as FLSA, FMLA, ADA, etc.

Using an Employer of Record for Compliant Employment

In addition to the benefits outlined above, a GEO employer of record provides a truly complete employment solution for companies that operate in multiple states.  All aspects of payroll, withholding, and registration are taken care of for the client, and the GEO service is designed for companies that lack the HR resources to manage multi-state employment obligations.  When new employees are hired, the GEO becomes involved right away with the onboarding and contracting process to ensure total compliance and seamless employment support.


A DIY approach carries obvious burdens for a company attempting to register and employ out-of-state workers.  The PEO service solution offers a middle ground for companies that do not want to turn over all responsibilities to a GEO employer of record.  Using a PEO can streamline some of the registration processes, but there will remain the responsibilities for other aspects of the employment relationship.  A GEO solution can be ideal for small businesses without the internal resources to handle multi-state insurance and withholding requirements for out-of-state employees.  Either option presents an attractive alternative to attempting to fulfill all of the statutory requirements for employment in multiple states.

Find out more about how an EOR can help your company

The information in this article is subject to changes in local legislation.

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