Background

Remote work expanded rapidly after 2020, and it changed the basic assumption that withholding follows the employer’s physical location. Employers now must ask: where does the employee perform the work? That answer drives withholding obligations, state registration, unemployment insurance contributions, and payroll reporting. In my experience advising employers, small mistakes — like failing to register in a state where an employee lives — are a common source of unexpected tax bills and penalties.

How it works — the essentials

  • Federal obligations: Employers must withhold federal income tax and the employee portion of Social Security and Medicare, deposit employment taxes, and file returns (e.g., Form 941). See IRS guidance on employment taxes for employers (IRS, Employment Taxes).
  • State and local: States set their own income-tax and withholding rules. Many states require employers to withhold where the employee works or is domiciled; others have special rules (reciprocal agreements, telework doctrines). Employers often must register with the state withholding agency and state unemployment insurance agency before paying wages.
  • Documentation: Collect a current federal W-4 and any required state withholding form. Keep signed declarations of work location and any telework agreements.

Practical steps employers should follow

  1. Collect accurate location data. Require each remote employee to provide a home address, work state(s), and changes in work location. Track temporary travel that may trigger withholding in another state.
  2. Determine each jurisdiction’s rule. Check the employee’s work state tax agency for whether withholding follows the employee’s resident state, work state, or employer location. Many state tax agencies publish employer guides.
  3. Register where required. If a state requires withholding for nonresident employees working there, register for withholding and state unemployment accounts before the first payroll affecting that state.
  4. Configure payroll systems. Set up multiple withholding rules in payroll software and map wages to jurisdictions based on tracked locations and time worked.
  5. Monitor and correct: If you discover an error, correct wage reports and withholdings quickly — many errors can be fixed by filing corrected W-2s or amended payroll returns (see IRS guidance on correcting payroll mistakes).

Real-world examples

  • Company A (CA-based) hires an employee who lives and works full time in Texas. Because Texas has no state income tax, no state income withholding is required, but the employer still must comply with federal employment tax and register for other state-level payroll obligations if applicable.
  • Company B has a remote employee who splits time between New York and New Jersey. The employer must apply each state’s rules for days worked and may need to withhold for both states or rely on reciprocity where it exists.

Common pitfalls and misconceptions

  • Assuming a single rule everywhere: States differ. For example, some apply an employer ‘convenience of the employer’ rule (historically used in New York) that taxes telework differently — check local law.
  • Waiting to register: Failing to register for withholding in a state before payroll can create back taxes, interest, and penalties.
  • Not documenting: If you can’t prove where the work was performed, states may assume withholding was required and hold the employer responsible.

Professional tips

  • Use payroll software that supports multi-state withholding and audit trails for employee location changes.
  • Build a simple employee-attestation process for location and remote work days; update this at hiring and annually.
  • Consult a payroll or state-tax specialist when hiring in high-compliance states (e.g., NY, CA) or when employees split time among states.

Internal resources

When to get professional help

If you have employees in multiple states, are hiring across state lines frequently, or face a complex split-time situation, engage a payroll tax specialist or employment-tax attorney. In my practice, early consultation prevents the largest exposures: late registrations, unpaid unemployment taxes, and incorrect W-2 reporting.

Quick reference: primary federal links

Professional disclaimer

This article is educational and does not constitute legal or tax advice. Rules vary by state and by year; consult your payroll provider or a licensed tax professional for guidance specific to your business.

Sources

  • Internal Revenue Service — Employment Taxes and Forms (IRS)
  • State tax agencies and unemployment insurance departments (varies by state)
  • FinHelp.io glossary articles linked above for practical, state-focused checklists and correction procedures.