Common Compliance Errors for Remote Workers and How to Fix Them

Quick overview

Remote work shifts where and how services are performed, which changes the rules that govern taxes, labor classification, payroll, and data protection. Left unaddressed, these gaps can cause underwithholding, incorrect state filings, misclassification penalties, and avoidable data breaches. The guidance below explains the most frequent errors I see in practice, why they matter, and precise steps to fix or prevent each problem.

Top compliance errors and how to fix them

1) State residency and multistate income tax mistakes

Problem: Employees move, travel, or provide services across state lines and fail to update residency or withholding details. Employers may continue withholding tax for the old state or fail to withhold where required, producing double tax exposure, refunds delays, and state notices.
Why it matters: Each state sets its own residency tests and withholding rules. Some states tax based on where you live; others tax based on where the work is performed. Incorrect withholding can result in interest, penalties, or an unexpected tax bill.
Fixes:

• Update your W‑4 and state withholding form immediately after any move (contact payroll) and follow your new state’s directions for residence and withholding (IRS guidance on withholding: https://www.irs.gov/ with state pages linked from state revenue department sites).
• Keep clear records of days worked in each state (calendar, time logs, or geolocation-enabled timekeeping if permitted).
• For recurring cross‑state work, consult your employer’s payroll or tax advisor. Employers should run nexus/residency reviews each quarter.
• See detailed multistate guidance: Multistate Tax Compliance for Remote Employees and Contractors (finhelp article: https://finhelp.io/glossary/multistate-tax-compliance-for-remote-employees-and-contractors/).

Practical tip from my practice: when a client relocates mid‑year, we prepare a state‑by‑state projection and, if appropriate, file part‑year returns to avoid surprises.

2) Misclassification: employee vs. independent contractor

Problem: Companies or workers assume independent contractor status to avoid payroll taxes and benefits, even when the working relationship meets employee‑status criteria.
Why it matters: Misclassification can trigger back payroll taxes, penalties, and liability for unpaid benefits. The IRS and Department of Labor both audit classification (U.S. Department of Labor: https://www.dol.gov/; IRS resources: https://www.irs.gov/).
Fixes:

• Use objective tests: look at control over work, financial relationship, and the permanence of the relationship. Employers should maintain documented role descriptions and written engagement terms.
• When unsure, request a formal determination (employers can seek a voluntary classification determination or use IRS guidance, including Form SS‑8 for a worker to request a determination).
• Keep contemporaneous documentation (contracts, scope-of-work, supervisory communications) that supports the agreed classification.

3) Payroll and benefit reporting mistakes

Problem: Remote employees sometimes miss reporting taxable fringe benefits or employer contributions; employers may forget local payroll taxes, unemployment insurance registrations, or workers’ compensation coverage in the employee’s state.
Why it matters: Omissions can lead to audits and retroactive employer obligations.
Fixes:

• Employers must register for payroll taxes and unemployment insurance in any state where they have employees; review obligations whenever employees relocate.
• Employees should confirm which benefits are taxable and how they’re reported on paystubs; payroll professionals can reconcile these amounts at year‑end.
• Use payroll providers that support multistate withholding and local tax tables.

4) Home office tax errors (for self‑employed and incompatible assumptions)

Problem: Employees and independent contractors assume they can claim the home office deduction or misapply it to expenses that don’t qualify.
Why it matters: For employees, the home office deduction is generally not available for federal tax purposes unless you are self‑employed or in certain qualifying situations. Misfiling creates audit risk.
Fixes:

• Self‑employed filers should follow IRS rules on exclusive and regular use and the simplified vs. actual expense methods (IRS guidance: https://www.irs.gov/).
• Employees should check employer‑reimbursed expense policies or accountable plan options to avoid improper deductions.
• For a clear primer, see Home Office Deductions for Remote Workers: What Qualifies (finhelp article: https://finhelp.io/glossary/home-office-deductions-for-remote-workers-what-qualifies/).

5) Data protection and information‑security lapses

Problem: Remote workers use unsecured Wi‑Fi, personal devices without encryption, or consumer file‑sharing apps that violate company policies or sector rules (e.g., HIPAA, GLBA).
Why it matters: A security lapse can trigger regulatory investigations, notification requirements, and remediation costs. Federal agencies and industry regulators expect reasonable safeguards; NIST provides widely accepted security frameworks (NIST: https://www.nist.gov/) and the FTC publishes breach guidance (https://www.ftc.gov/).
Fixes:

• Employers should require VPNs, multi‑factor authentication (MFA), device encryption, and approved collaboration tools.
• Implement an acceptable use policy and regular security training for remote staff.
• Maintain an incident response plan, including breach notification procedures in affected states.

6) Recordkeeping and documentation shortfalls

Problem: Incomplete time records, missing receipts for expenses, and lack of written policies make it harder to document compliance or contest assessments.
Why it matters: Proper documentation is essential in audits, unemployment claims, and classification disputes.
Fixes:

• Maintain organized digital records (paystubs, employment agreements, expense receipts) for at least the time periods recommended by the applicable tax or labor authority.
• Employers should publish and enforce remote work policies that describe reporting expectations, expense reimbursement rules, and timekeeping procedures.

A practical compliance checklist (actionable steps)

• Immediately update payroll and HR when you change residence or primary work location.
• Keep a daily record of where work is performed and why (client work, travel, temporary assignment).
• Confirm classification and get written agreements; if classification changes, document the transition.
• Use a secure, employer‑approved device and enable MFA and automatic updates.
• Reconcile paystubs quarterly and address withholding discrepancies early.
• Maintain copies of contracts, time logs, and expense receipts for at least 3–7 years depending on state rules.
• If you’re an employer, review multistate registrations and unemployment tax accounts whenever you hire remote staff in a new state.

Preparing for audits and notices

If you receive a state or federal notice:

• Don’t ignore it. Respond within the stated timeframe and request clarification in writing.
• Gather supporting records (payroll, W‑4s, work location logs) and, if needed, engage a tax professional experienced in multistate cases.
• Consider voluntary disclosure or offer in compromise options if liabilities are significant; consult counsel before taking action.

Employer responsibilities vs. worker responsibilities

Employers must establish policies, correctly register for state payroll accounts, and withhold taxes appropriately. Workers must keep employers informed of residence or location changes, keep accurate time and travel logs, and follow security policies.

For employers building remote rules, see Compliance Checklist for Remote‑First Companies with U.S. Employees (finhelp article: https://finhelp.io/glossary/compliance-checklist-for-remote-first-companies-with-u-s-employees/).

Common misconceptions

• “I only pay taxes where my employer is located” — Not always true. Many states tax based on where work is performed.
• “Working remotely makes me a contractor by default” — Classification hinges on control and the nature of the relationship, not location.
• “Small data mistakes won’t matter” — Small security lapses can lead to costly breach notifications and regulatory fines.

Final notes and professional disclaimer

Remote work complicates compliance, but many errors are preventable with clear policies, proactive recordkeeping, and timely professional advice. In my practice, taking 30–60 minutes annually to review residency, withholding, and classification with a tax advisor has prevented costly corrections for clients.

This article is educational and not a substitute for personalized legal, tax, or security advice. For specific issues, consult a qualified tax professional, employment law attorney, or your company’s compliance officer. Authoritative resources include the IRS (https://www.irs.gov/), U.S. Department of Labor (https://www.dol.gov/), NIST (https://www.nist.gov/), and the FTC (https://www.ftc.gov/).

Internal resources on FinHelp referenced in this article:

• Multistate Tax Compliance for Remote Employees and Contractors: https://finhelp.io/glossary/multistate-tax-compliance-for-remote-employees-and-contractors/
• Home Office Deductions for Remote Workers: What Qualifies: https://finhelp.io/glossary/home-office-deductions-for-remote-workers-what-qualifies/
• Compliance Checklist for Remote‑First Companies with U.S. Employees: https://finhelp.io/glossary/compliance-checklist-for-remote-first-companies-with-u-s-employees/

For help implementing these fixes, consult a tax professional familiar with multistate payroll and an IT/security expert to harden remote access systems.