What happens tax-wise when I hire a remote employee in another state?
Hiring a remote employee in another state usually creates obligations in that state for your business. Their presence can establish income tax nexus, and you generally must register for payroll, withhold that state's income tax, and pay into its unemployment system. The employee is taxed where the work is performed, so a single remote hire can pull your company into a new state's tax system.
Key points
- A remote employee is taxed by the state where the work is physically performed, so the employer generally withholds that state's income tax.
- Hiring a remote employee usually requires the employer to register for withholding and unemployment insurance in the employee's state before the first paycheck.
- One remote employee can create income tax nexus for the business, requiring an income tax return and apportionment in that state.
- State unemployment insurance is owed to the single state where the employee's work is localized, which may differ from the hiring state.
- Reciprocity agreements simplify withholding only for commuters between neighboring states that have signed them, not for most remote workers.
What does the employer have to set up when an employee works from another state?
Payroll comes first. When an employee performs work in a state, that state generally expects the employer to register for a withholding account, withhold the state's income tax from the employee's wages, and register with its unemployment insurance agency and pay contributions. This applies even when the company has no office there and the employee is its only presence in the state.
Registration has to happen before remittance, because withholding and unemployment tax cannot be paid without an account number. Several states also require new-hire reporting and workers' compensation coverage for the employee, which is typically arranged by the payroll provider and the company's insurance broker rather than the CPA.
Which state's income tax gets withheld?
Withholding follows where the work is done, not where the company is based. Wages earned by an employee working from home in another state are sourced to that state, so its income tax generally applies. Reciprocity agreements between some neighboring states let commuters pay tax only to their home state, but they cover specific state pairs and do not help a genuinely remote worker in a distant state.
A few states, New York among them, apply a convenience-of-the-employer rule that treats a nonresident's remote workdays as performed in the employer's state unless the remote arrangement is for the employer's necessity. An employee in that position can face withholding claims from two states, and the employer's payroll setup has to reflect it.
Does one remote hire make the business file taxes in that state?
Often, yes. An employee working in a state is one of the clearest forms of income tax nexus, which gives that state a claim to tax a share of the company's profit. The business then files an income tax return there, whether a corporate return or a pass-through information return, and apportions income to that state under its formula, which for many states is now based mainly on where sales are made.
Unemployment insurance is owed to one state per employee under the localization rules, generally the state where the employee's work is based, which can differ from the state where the person was originally hired. Local income taxes in some cities and counties add a further layer.
What are the limits and the common mistakes?
The obligations are triggered by facts the employer may not know. An employee who moved without telling anyone, or who splits the year between two states, creates a withholding gap that surfaces later as back tax and penalties. The fix is procedural: confirm the work location before the first paycheck, register in that state, and require employees to report a move before it happens.
A remote hire in a state with no income tax removes the withholding piece but not the unemployment registration or, in some cases, a gross-receipts or franchise tax filing. Handled at the time of hire, an out-of-state employee is a routine addition to the filing calendar; handled after the fact, it becomes back withholding and a late nexus return.
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People also ask
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- What payroll taxes do I owe when I hire my first employee?
- Is my worker a contractor or an employee?
- What does an employee really cost beyond salary?
Sources
Related guides: cfo, professional services
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
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