Employer of record in South Dakota: PEO rules, payroll registration and what the client still owns (2026)

South Dakota does not license employers of record or professional employer organizations (PEOs). As of November 2026, its only PEO law is in the sales tax chapter: SDCL 10-45-96 taxes a PEO's gross receipts but lets it deduct the wages, payroll taxes and benefits it pays, and ARSD 64:06:02:89.01 requires each PEO doing business in the state to be approved by the Department of Revenue, or pay sales tax on its whole fee. The reemployment assistance (unemployment) account is registered in the client's name, workers' compensation is not legally required but leaves an uninsured employer open to suit, and there is no state income tax to withhold.

This page is for a company outside South Dakota, or a staffing firm, deciding whether to employ someone in South Dakota through an employer of record (EOR) or PEO, or to register itself. The general difference between an EOR, a PEO, a staffing agency and payrolling is in what is an employer of record and payrolling services explained. The 1981 repeal of the employment agency license and the sales tax on temporary staffing invoices are covered in staffing agency license in South Dakota, and the full state checklist is in hiring employees in South Dakota. This page adds what the Department of Revenue's approval means for an EOR contract, who owes tax on the EOR's fee, whose reemployment account is used, how workers' compensation works without a mandate, and what stays with you.

South Dakota employer of record and PEO rules at a glance

Does South Dakota license employer of record companies or PEOs?

No. There is no PEO registration act of the kind Nebraska or North Dakota run, and no employment agency license since 1981. We found no South Dakota statute outside the sales tax chapter that defines PEOs or splits employer duties between a PEO and its client. What South Dakota does have is a tax test, and it shapes how an EOR contract should be written.

The Department of Revenue's PEO definition

SDCL 10-45-97 defines a PEO, for the sales tax deduction, as a firm that:

• "Enters into a contractual agreement with a client company to create a co-employment relationship for the provision of payroll, benefits, and other human resources functions";
• "Covers at least seventy-five percent of the client company's full-time or full-time equivalent employees domiciled in South Dakota"; and
• "Maintains separate books and records of account for each client company."

ARSD 64:06:02:89 then says a co-employment relationship exists only if the contract stipulates six things:

1. the PEO assumes "the payment of wages, salaries, payroll taxes, payroll deductions, workers' compensation costs, insurance premiums, welfare benefits, and retirement benefits," and files the required tax returns;
2. "The client company must be the employer to any existing employees prior to the contractual relationship";
3. "The client company retains primary control over the hiring, firing, wage rates, salary increases, training, and directing the day-to-day activities of the co-employees";
4. if the contract ends, the co-employees' employment with the PEO ends too;
5. if a co-employee leaves the client, that person's employment with the PEO ends; and
6. the PEO "does not manage or direct the operation of the client company's business."

For a company with a single South Dakota worker on an EOR's payroll, the 75% test is usually met, because that worker is all of the client's South Dakota workforce. The harder terms are the second and third: an EOR contract that gives the EOR control over pay, hiring or firing may not qualify as a PEO for South Dakota tax. Under SDCL 10-45-98, the deduction never applies to temporary help services or to arrangements that "temporarily" assign a firm's employees to cover absences, skill shortages, seasonal workloads or projects.

How approval works

ARSD 64:06:02:89.01 says "Each professional employer organization, doing business in South Dakota, must be approved by the Department as a professional employer organization," on a form naming the PEO and the client, with "A copy of the contract between the professional employer organization and the client." The Department of Revenue's PEO tax fact (March 2024) spells out the steps: apply for a sales tax license first ("PEO status will not be considered if the sales tax application has not been submitted"), complete the Request for Approval with each client's details, including the location and number of its full-time South Dakota employees, and send "A copy of the signed contract ... (a sample contract is not acceptable)." The tax fact lists no approval fee. It also notes that "Co-employees create physical nexus for the professional employer organization," so a PEO with a worker in South Dakota should expect to hold a South Dakota sales tax license.

Who owes South Dakota sales or use tax on an EOR's fee?

This is the cost question unique to South Dakota, because the state taxes most services. The rules, from the statutes and the Department of Revenue's tax fact:

• Approved PEO. "The gross receipts of a professional employer organization are specifically subject to the tax," but it "may deduct from its taxable gross receipts its actual disbursements, including appropriate reserves, for the wages, salaries, payroll taxes, payroll deductions, workers' compensation costs, insurance premiums, welfare benefits, retirement benefits, and other employee benefits of its co-employees" (SDCL 10-45-96). In practice the tax falls on the administrative fee.
• Not approved. The PEO "will be required to pay sales tax on all fees charged ... with no deduction for actual disbursements" (ARSD 64:06:02:89.01). The tax fact adds that an organization not approved "may be a temporary help agency or a payroll processing company."
• Payroll processing. The service fee is taxable, but reimbursements for amounts paid on the client's behalf are deductible only if "separately stated on the invoice."
• Temporary help. Taxed "on all fees charged to the client with no deduction for actual disbursements to the employee."
• Where it is due. The tax fact says sales tax on PEO services is sourced to "the location of the company that contracts with the professional employer organization" (its headquarters if it has several), and "Businesses owing use tax on a professional employer organization service will owe use tax on the total charge" less the same disbursements, with "Use tax ... due where the employees are located."

The state sales and use tax rate is 4.2% in the Department of Revenue's July 2026 guide, and municipal tax can apply on top. For a client headquartered outside South Dakota, the use tax line is the one to raise with your tax adviser, and the invoice should separate the administrative fee from wages and benefits either way.

Whose reemployment assistance account is used?

The client's. South Dakota calls unemployment insurance "reemployment assistance," and the Department of Labor and Regulation's employer registration application says: "If you are a PEO, you must register this account under your client's FEIN and business information." So the account, the rate and the experience are in your name, even if the PEO files the quarterly reports. You become liable under SDCL 61-1-4 once you pay "one thousand five hundred dollars or more" in wages in a calendar quarter, or have at least one person in employment in "twenty different calendar weeks," in the current or preceding year. Ask the provider to show you the account registration and each quarter's report.

The department's posting page says South Dakota law requires only two workplace postings, and that the reemployment assistance notice must also be given "to workers individually and at the time of separation." Agree in the contract who sends it when the assignment ends.

Who carries workers' compensation in South Dakota?

No one has to, which is why the contract matters. The Department of Labor and Regulation's workers' compensation page says "There is no law in South Dakota requiring any employer to carry workers' compensation insurance. However, it is highly recommended. An uninsured employer may be sued in civil court by an injured worker." The statutes set the price of going without:

• an employer that has not secured coverage "shall be deemed to have elected not to operate under the provisions of this title" (SDCL 62-5-7); and
• its injured employee may sue at law for damages, or claim benefits in circuit court at "that provided by § 62-4-1 plus twice the amount of other compensation allowable" (SDCL 62-3-11).

South Dakota's workers' compensation title defines an employer as anyone "using the service of another for pay" (SDCL 62-1-2), which can describe both the EOR and you. The Department of Revenue's rule expects an approved PEO's contract to make the PEO responsible for "workers' compensation costs," so ask for the certificate, check that it covers South Dakota and names your company or worksite, and do not assume coverage exists because the state does not require it.

Which South Dakota registrations, reports and notices still apply?

• No state income tax. The Department of Revenue says South Dakota "is one of seven states that does not impose a state income tax," so there is no withholding account and no state W-4.
• New-hire reporting. New and rehired employees "must be reported to the New Hire Reporting Center within 20 days of the first day of work," per the Department of Labor and Regulation, under SDCL 25-7A-3.3. Agree which party files.
• Postings. The two state workplace postings and the individual reemployment notice at separation, above.
• Paid leave programs. We found no South Dakota paid sick leave, paid family leave or disability insurance program that needs an employer registration.
• E-Verify. No state mandate after House Bill 1209 died in 2026; see E-Verify requirements in South Dakota.

What does the client company still own in South Dakota?

Without a PEO act, nothing in South Dakota law moves employer duties off the client, and the Department of Revenue's rule assumes the client "retains primary control over the hiring, firing, wage rates, salary increases, training, and directing the day-to-day activities" of the worker. In practice:

• The reemployment account, registered under your FEIN.
• Hiring decisions. South Dakota has no private-employer statute on pay transparency, salary history, ban-the-box or credit checks, per the state hiring checklist; see ban the box in South Dakota and South Dakota background check laws. Remote postings can still fall under other states' pay range laws.
• Drug testing. No general statute, with medical cannabis protections in hiring; see South Dakota drug testing laws.
• Interviews. One-party consent for recording; see South Dakota recording consent law for interviews.
• Restrictive covenants. Non-competes up to two years, with limits for health care practitioners; see South Dakota non-compete law, and check whose name is on the agreement.
• Co-employment liability. Wage, injury and discrimination claims can name both parties; see joint employer liability for staffing agencies.
• Federal payroll taxes. The IRS says the client "generally remains responsible" for employment taxes unless the PEO is IRS-certified; check the CPEO public listings.

When is registering your own company in South Dakota the better route?

South Dakota is one of the simplest states to employ in directly: a reemployment assistance account, 20-day new-hire reports, two postings, no income tax withholding, and a workers' compensation policy that is optional in law but advisable in practice. Since a PEO arrangement already puts the reemployment account in your name and may add sales or use tax to the fee, registering yourself tends to win when:

• you already run multi-state payroll and the worker is not in a high-risk job;
• the provider is not approved by the Department of Revenue, so its whole fee may be taxable; or
• the provider's contract gives it control over pay and firing, which does not fit the department's co-employment terms.

An approved PEO still fits a small team that wants payroll, benefits and workers' compensation bought and run together. A temporary help firm fits a genuinely temporary need, but its invoices carry sales tax on the full amount.

Questions to ask an employer of record or PEO before signing for South Dakota

1. Has the Department of Revenue approved you as a PEO for our contract, and do you hold a South Dakota sales tax license?
2. Does our contract contain the six terms in ARSD 64:06:02:89, including our primary control over hiring, firing and pay?
3. Will your invoice separate your administrative fee from wages, payroll taxes and benefits, and do you charge sales tax on it?
4. Will you register our reemployment assistance account under our FEIN, and send us each quarterly report?
5. Who carries workers' compensation for our South Dakota worker, does the certificate cover South Dakota, and what happens if a claim arises before coverage starts?
6. Who reports the hire within 20 days, and who gives the worker the reemployment notice at separation?
7. If our worker moves to another state, which state's rules will you apply, and how fast?
8. Are you an IRS-certified PEO, and who is liable for federal employment taxes if a deposit is missed?
9. Can we move the worker to our own payroll later, and is there a fee?

Employer of record rules in other states: Nebraska, North Dakota, Minnesota, Utah and Texas.