Why a state nexus checklist matters

When employees live or work outside your company’s home state, their location can create “nexus” — a legal connection that gives a state the authority to require tax registration, withholding, payroll reporting, unemployment insurance contributions, and sometimes sales or corporate tax filings. Nexus rules vary widely by state and by tax type (income, payroll, sales, corporate), so a repeatable checklist reduces risk and saves time. Multistate tax authorities and courts — and the 2018 Wayfair decision for sales tax — have made nexus a central compliance issue for remote-first teams (see Multistate Tax Commission (MTC) and Tax Foundation guidance).

(Authoritative references: IRS business tax pages; Multistate Tax Commission; Tax Foundation.)

Quick checklist (one-page action list)

  1. Identify current remote worker locations and work days (state and local jurisdictions).
  2. Check payroll withholding rules for each state where employees work; register to withhold if required.
  3. Register for state unemployment insurance (SUI) accounts where employees’ services create liability.
  4. Review state income/corporate tax nexus rules — determine if payroll or business activity creates filing obligations.
  5. Review sales and use tax thresholds (economic nexus) and register if your sales meet a state’s thresholds (post-Wayfair).
  6. Verify worker classification (employee vs. contractor) per state law; incorrect classification can create retroactive liability.
  7. Check business licensing or foreign qualification requirements for doing business in that state.
  8. Maintain records showing where work was performed (timekeeping, telework agreements, IP access logs).
  9. Monitor changes in state law and fiscal years for lookback periods.
  10. If past noncompliance is suspected, evaluate voluntary disclosure programs (VDPs) and penalty mitigation.

Detailed step-by-step guidance

Step 1 — Map your people

  • Create a spreadsheet with each worker’s home address, work state, number of days worked from that location, and start date. This simple map drives almost all nexus decisions.
  • Tip: Ask employees to update work location when they change states; require manager sign-off for long-term remote placements.

Step 2 — Payroll withholding and wage sourcing

  • Most states require employers to withhold state income tax when an employee performs services in the state, even if the employer is based elsewhere. Register with the state tax department or workforce agency before you run payroll for that state.
  • Some states treat wages as sourced to the employer’s location unless the employee’s services are performed in another state (examples vary); check state guidance and reciprocity agreements between states.
  • Action: Register for withholding accounts and set up payroll to apply the correct state tax tables. Keep documentation of work location for each pay period.

Step 3 — Unemployment insurance (SUI)

  • States can require employers to report and pay SUI for employees who work in the state. Frequently this is determined by where the employee performs services, even if the employer pays from another state.
  • Action: Contact the state workforce agency to determine if you must register and contribute for each employee.

Step 4 — Corporate income/franchise tax and nexus

  • Employee presence can create nexus for corporate income or franchise taxes if workers’ activities are sufficiently connected to the state (e.g., regular, recurring services, sales generation, or decision-making). States use differing tests; some look for physical presence, substantial economic activity, or employee headcount.
  • Action: For each state with remote employees, review nexus thresholds and apportionment rules. When in doubt, obtain a written determination or consult a state-experienced CPA.

Step 5 — Sales and use tax (economic and physical nexus)

  • After South Dakota v. Wayfair, states can require remote sellers to collect sales tax based on economic thresholds (sales dollars or transaction counts). Employee activity in a state — such as soliciting sales or fulfilling orders — can also create physical presence nexus for sales tax.
  • Action: Check each state’s economic nexus thresholds and sales tax registration requirements. If you have employees in a state who support sales, register and collect sales tax where required.

Step 6 — Independent contractor vs. employee classification

  • Misclassification drives back taxes, payroll penalties, and state unemployment liability. States look to many factors (control, permanence, who supplies tools) and the tests vary by jurisdiction.
  • Action: Use written contracts, consistent classification reviews, and consider state-by-state tests. Consult counsel for borderline cases.

Step 7 — Local licensing, business registration, and payroll taxes

  • Some localities require business licenses or have local payroll taxes and gross receipts levies tied to employee presence.
  • Action: Add local jurisdiction checks to your checklist, especially for large metro areas.

Step 8 — Recordkeeping and documentation

  • Maintain contemporaneous evidence of where an employee performed work: signed telework agreements, geolocation or IP logs (with privacy compliance), time sheets, and expense reports.
  • These records are crucial if a state audits your nexus determinations.

Step 9 — Remediation and voluntary disclosures

  • If a review shows unregistered activity in a state, many states offer voluntary disclosure programs to limit penalties and narrow lookback periods.
  • Action: Weigh the cost of registration with the potential penalty exposure; consult a specialist to evaluate VDP eligibility.

Practical examples (short)

  • Tech startup: Engineers living in three states created withholding and unemployment obligations in those states. The company registered payroll accounts, amended prior returns under a VDP to reduce penalties, and implemented a policy requiring manager approval before hiring out-of-state.

  • Market research firm: Contractors in multiple states initially treated all remote talent as independent contractors. After a classification review, they reclassified several workers, registered for state withholding, and adjusted their 1099 reporting.

State-specific nuances to watch

  • “Convenience of the employer” rules (notably applied by New York historically) can source wages to the employer’s state even when the employee works remotely for personal convenience. Treat these as state-specific exceptions and verify current law with the state department of revenue.
  • Economic nexus thresholds for sales tax vary — some states use a $100,000 sales floor, others use transaction-count thresholds or lower dollars. Always check the current numeric thresholds on the state tax website.

(Reference: Multistate Tax Commission; Tax Foundation; state revenue departments.)

Timeline and who should act

  • Immediate (within 30 days): Map employee locations; register for withholding and SUI where employees are performing services.
  • Short term (30–90 days): Review sales tax exposure, check contractor classification, and register for state business licenses as needed.
  • Ongoing (quarterly / annual): Monitor law changes, update employee location records, perform nexus reviews before hiring new out-of-state staff.

Common mistakes and how to avoid them

  • ‘‘Assume no nexus’’ — Don’t rely on the idea that remote work is intangible and therefore exempt. States have broad rules and high audit focus on remote work.
  • Treating contractors uniformly — Different states have different tests; classify carefully and document the rationale.
  • Poor documentation — Keep contemporaneous proof of where services were performed; it’s often decisive in audits.

Frequently asked questions

Q: Can a remote employee create nexus for my company in multiple states?
A: Yes. Each state where an employee performs services may assert nexus for withholding, SUI, corporate income, or sales tax purposes depending on activity and local rules.

Q: What if an employee temporarily works in another state for a few weeks?
A: Short-term assignments may not always create long-term nexus, but recurring or lengthy temporary work can. Track days and consult state rules; some states have de minimis day-counts.

Q: Are there relief programs if we discover past noncompliance?
A: Many states offer voluntary disclosure programs (VDPs) that limit penalties and reduce lookback periods. The terms vary by state.

Recommended policies for employers

  • Require pre-approval for employees who want to change work states.
  • Add nexus review to onboarding and payroll setup processes.
  • Keep a central compliance owner (payroll manager or tax director) responsible for registrations and monitoring.

Internal resources and further reading

Authoritative external resources

  • IRS — Business Taxes: https://www.irs.gov/businesses (general federal guidance; states set their own nexus rules)
  • Multistate Tax Commission — guidance and model policies: https://www.mtc.gov
  • Tax Foundation — analysis of Wayfair and state threshold rules: https://taxfoundation.org
  • State revenue and workforce agencies — for state-specific withholding and SUI guidance (search the state’s department of revenue or labor website).

Final professional tips (from practice)

In my 15+ years advising companies on multistate payroll and tax compliance, the single most effective control is a simple, enforced process: require that HR and hiring managers confirm an employee’s work state before the offer is accepted. That small step prevents most accidental nexus exposures.

Professional disclaimer

This article is educational and does not constitute legal or tax advice. Nexus rules are complex and state-specific; consult a qualified CPA or tax attorney for advice tailored to your facts and to review any potential liability or voluntary disclosure options.