Remote Worker Payroll Compliance After Multi-State Work Arrangements

Why this matters

Remote work complicates payroll because U.S. state tax systems are independent. An employee who performs work in State A but is paid by an employer in State B can create filing, withholding, and registration obligations in State A — sometimes almost immediately. Failure to comply can lead to back taxes, penalties, interest, and unexpected SUTA or payroll tax liabilities that are assessed retroactively. In my practice advising employers, the most common costly errors are delayed state registration and inconsistent withholding across pay periods.

Key compliance components (what employers must check)

• Employer registration: Register with each state where employees perform work. Registration triggers withholding and SUTA accounts.
• State income tax withholding: Withhold based on the employee’s state of work or residence as required by that state’s rules.
• State unemployment insurance (SUTA): Determine which state’s UI rules apply and open employer accounts; rates and experience-rating rules differ by state.
• Local taxes and municipal obligations: Some cities or counties levy payroll taxes or require disability insurance contributions.
• Wage-and-hour and leave laws: Comply with state-level minimum wage, paid leave, and meal-break rules where the employee works.
• Nexus and corporate tax exposure: Remote employees can create nexus for corporate income or other business taxes in a state.
• Reporting and filing: File state payroll tax returns and remit deposits on the schedule required by each state.

(For operational checklists see our Employer Compliance Checklist: Payroll, Withholding, and Reporting.)

Step-by-step employer playbook for multi-state remote payroll

1. Map where employees actually work

• Use contemporaneous records: time-stamped VPN logs, location-confirmed timesheets, and signed remote-work agreements that state work location.
• Date-stamp moves and travel; short business trips can change withholding status in some states.

1. Determine withholding and residency rules

• Treat the employee’s state of residence and the state where the work is performed separately. Some states tax based on residency; others tax based on source of work.
• Check reciprocity agreements. A handful of neighboring states allow employees to withhold only for their state of residence (see our page on How State Reciprocity Agreements Affect Withholding for Cross-Border Workers).

1. Register as an employer in the required states

• Register quickly once you know an employee will work from a state. Many states expect employer registration within 30–60 days of having payroll exposure.

1. Set up withholding and deposits

• Configure payroll software to withhold correctly for each state and to remit deposits on state-specific schedules.
• Review deposit frequency requirements; states have different look-back windows and thresholds.

1. Establish SUTA coverage and allocate wages

• Apply state rules to determine which state’s UI law applies (often the state where the employee performs services).
• When employees split time between states, allocate wages according to the states’ guidance to compute SUTA taxable wages.

1. Maintain records and audit trails

• Keep clear documentation of work locations, pay dates, and communications. During audits, states will ask for proof of the employee’s work location.

1. Reconcile and correct prior periods promptly

• If you discover missed registrations or withholding, correct withholdings and file prior-period returns immediately. States often allow voluntary disclosure programs to reduce penalties.

Common state-specific traps to watch for

• Telecommuter nexus: Some states treat remote employees as creating tax nexus for the employer, triggering income/franchise tax or sales/use tax registration obligations (see State Nexus Rules: When Your Business Owes State Taxes).
• Short-term telework rules: A few states have de minimis or temporary telecommuting exceptions; others do not. Relying on a casual travel policy can be risky.
• Local tax and mandatory benefits: New York City payroll taxes, California disability insurance (SDI), and some municipal levies are common surprises.
• Misclassifying time and location: Using the employer’s headquarters state as the default for all remote staff is a frequent mistake.

Practical examples from the field

• Tech startup example: A Texas-headquartered startup hired a New York-based developer. Texas has no state income tax, but New York required the employer to register and withhold New York state taxes and to comply with New York wage statements and disability/paid leave rules. Early registration and switching payroll runs to New York withholding prevented a large notice from New York State.

• Consultancy example: An Illinois firm with a consultant who moved to Colorado mid-year had to (a) register in Colorado for withholding and UI, (b) reallocate state UI wages for the year, and (c) prepare a nonresident tax reconciliation for Illinois. Timely consultation with a payroll specialist avoided SUTA misreporting.

Tools and technology

• Use payroll platforms that support multi-state withholding, state-specific deposit scheduling, and automatic tax table updates.
• Maintain an HRIS with verified employee work locations and effective dates to feed payroll accurately.
• Integrate timekeeping that captures location data (with appropriate employee notice and privacy controls).

When remote work creates state tax nexus

Remote employees can create nexus when their presence in a state is regular and creates a market or a business base there. Nexus rules are state-specific and can apply to corporate income, franchise tax, and sales tax. When an employee’s activity is sufficient to meet a state’s threshold, the business must register, collect, and remit the relevant taxes.

For an employer-facing guide on nexus considerations, see our State Nexus Rules: When Your Business Owes State Taxes.

Reporting, audits, and voluntary disclosure

• Annual filings: File state withholding returns and deposit reports as required by each state.
• Audits: State departments of revenue and labor frequently audit payroll and withholding. Good records and timely registrations reduce penalties.
• Voluntary disclosure programs: Many states reduce penalties when employers self-report previously unregistered payroll activity. Act quickly when errors are discovered.

Specific filing items to confirm

• State withholding registration number and deposit schedule
• SUTA account and rate notices
• Local tax registration (city/county) where applicable
• Employee withholding certificates (state equivalents to Form W-4) if required

Quick compliance checklist (prior to first payroll run after a remote hire or move)

• Confirm the employee’s principal work state and effective dates.
• Register as an employer in the work state(s).
• Set up withholding tax codes in payroll software.
• Open SUTA account(s) and confirm rate and wage base.
• Review local tax obligations and mandatory benefits.
• Notify the employee about state-specific payroll deductions and provide any state withholding forms.

Resources and authoritative guidance

• IRS: Employer’s Tax Guide (Publication 15) and the IRS withholding resources at irs.gov.
• U.S. Department of the Treasury: guidance on federal tax administration and intergovernmental tax policy at treasury.gov.
• Consumer Financial Protection Bureau: resources on payroll and wage payments at consumerfinance.gov.
• State revenue departments: consult the revenue department or labor department websites for each state where you have payroll exposure.

Interlinks for deeper reading

• Employer compliance step-by-step: Employer Compliance Checklist: Payroll, Withholding, and Reporting — https://finhelp.io/glossary/employer-compliance-checklist-payroll-withholding-and-reporting/
• Withholding mechanics for telecommuters: Handling Multistate Withholding for Telecommuting Employees — https://finhelp.io/glossary/handling-multistate-withholding-for-telecommuting-employees/
• Nexus guidance: State Nexus Rules: When Your Business Owes State Taxes — https://finhelp.io/glossary/state-nexus-rules-when-your-business-owes-state-taxes/

Frequently made mistakes and how to avoid them

• Mistake: Treating the employer’s state as the default for all remote staff. Fix: Map employee work locations and register where they work.
• Mistake: Waiting until year-end to reconcile state withholdings. Fix: Reconcile monthly or quarterly.
• Mistake: Overlooking municipal payroll taxes or disability insurance. Fix: Review local law checklist when hiring or approving remote work.

Professional insight

In my practice advising small and mid-size employers, the single best control is day-one enrollment of a remote-worker compliance checklist. That includes immediate employer registration where needed and a pay-run validation before the first paycheck. Employers who standardize that workflow avoid most penalties and administrative headaches.

Disclaimer

This article is educational and does not constitute legal or tax advice for specific situations. State tax law and administrative procedures change; consult a qualified payroll tax professional or state tax authority for guidance tailored to your facts.

Notes

This entry references federal and state resources including IRS guidance (Publication 15) and state revenue department rules. For firm-specific answers, engage a CPA or employment-law attorney.