Separation of Payroll by State 101

June 8, 2022 • Previsor

Are you a business owner with employees working in several states? If you have employees working in multiple state locations, separate payroll records must be maintained for each one. Our Premium Consultation team reviews these records each year during a policyholder’s annual audit. Keeping correct payroll records ensures that employers are:

  • Paying the right amount of premium.
  • Have coverage in each state they are working in.
  • Saving on premium costs whenever possible.

To learn more, hear from Chris Grassi, MEM’s Senior Premium Consultant, in the video below.

How do I maintain separate payroll by state?

Payroll records need to be accurate. They must reflect the actual time an employee worked and the wages they earned in each state. Estimating payroll, or assigning a percentage to it, isn’t allowed. See examples below:

Example 1

Example #2

The separate payroll by state maintained for your workers comp policy may differ from taxable wages by state. Consult a tax professional for any state payroll reporting questions.

Payroll for things that are not directly related to a class code, such as travel time or bonuses, must be allocated to the class code with the largest payroll amount applicable to the individual employee.

What happens if separation of payroll by state isn’t maintained?

Employers that don’t keep separate payroll records run the risk of not being properly covered – and having their payroll assigned to the highest rated state.

If a policyholder fails to maintain these records, action may be taken and can include nonrenewal of the policy. There are just two exceptions to this rule: 

  1. Owner-only risks. This exception applies to businesses that are run by an owner only, and do not have any employees or subcontractors. The owner’s payroll should be listed in the state of domicile. A $0 payroll may be used for all other states with exposure. 
  1. Transportation risks. This exception applies to transportation drivers. Each driver’s payroll is assigned to one state per NCCI guidelines. A payroll of $100 will be listed in each state without driver payroll in the event that a claim occurs. Once an audit is complete, this will be reduced to $0 in each state where there is no payroll exposure. 

Maintaining accurate records helps policyholders both save on premium and avoid unexpected out-of-state costs. 

June 8, 2022
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