Quick checklist

  • Map all employee and contractor locations and update continuously.
  • Register where required for state withholding, unemployment (SUTA), and sales/use tax when nexus exists.
  • Set up payroll deposits (EFTPS or state portal) and file required federal forms (Form 941, Form 940) on schedule. (See IRS Publication 15.)
  • Classify workers correctly (employee vs independent contractor) and collect W-9/W-8 forms.
  • Apply state withholding rules for nonresident employees and reciprocal agreements.
  • Monitor economic nexus thresholds for sales tax and state income tax obligations.

Step 1 — Map your workforce and recordkeeping

Begin with a live roster that captures where each employee or contractor works and the dates they started remote work. Record the work location at payroll cutoff each pay period. This single practice prevents common nexus surprises and supports multistate payroll filings. In my practice, a simple weekly export from HRIS saved startups from late-state registrations.

Step 2 — Register for employer accounts and set payroll deposits

  • Federal: confirm your EIN and enroll in EFTPS for federal tax deposits; file Form 941 (quarterly) and Form 940 (annual FUTA) as required. (IRS Publication 15, Employer’s Tax Guide.)
  • State: register for withholding, unemployment insurance (SUTA), and any disability insurance accounts in states where employees perform services. Deposit schedules (monthly vs. semiweekly) vary by payroll tax liability—check the IRS for federal deposit rules and state revenue sites for local schedules.

Useful internal resources: see our Payroll Tax Compliance Checklist for New Employers and Payroll Deposit Schedules (internal links below).

Step 3 — Determine nexus and state registration triggers

Nexus can be created by a remote employee, a sales threshold (economic nexus), or physical presence such as equipment or inventory in a state. Sales-tax economic nexus (post-Wayfair) typically uses dollar or transaction thresholds that differ by state; income- or payroll-related nexus rules also differ. Treat each state independently:

  • Sales tax nexus: check state thresholds before you collect or remit sales tax. (See state revenue offices and FinHelp nexus guides.)
  • Income/payroll nexus: an employee working in a state usually triggers payroll withholding and unemployment filing obligations in that state.

We link to two practical FinHelp guides: Nexus for Remote Employees: State Income Tax Considerations and Nexus Basics for Service-Based and Digital Businesses.

Step 4 — Withholding: employees, contractors, and foreign workers

  • Employees: withhold federal income tax plus Social Security and Medicare; follow state withholding rules based on employee worksite or resident rules. Use Form W-4 to capture federal withholding info.
  • Contractors: generally no payroll withholding for independent contractors (collect Form W-9); however, backup withholding or state-specific withholding can apply. Misclassifying employees as contractors can cause trust-fund and payroll liabilities.
  • Nonresident aliens and foreign vendors: withholding rules differ (see IRS Publication 515); collect appropriate W-8/W-9/8233 forms and consult payroll provider or international tax counsel.

Step 5 — Compliance controls and payroll operations

  • Use a payroll provider that supports multistate filings and local tax updates.
  • Automate wage-location tracking and tax-exempt documentation.
  • Reconcile payroll tax deposits vs. returns monthly; early reconciliation prevents trust-fund issues.

Common pitfalls and penalties

  • Ignoring remote employee locations; failing to register in a state before payroll runs can lead to penalties and interest.
  • Misclassifying workers; reclassification can trigger back taxes, penalties, and the Trust Fund Recovery Penalty (TFRP). (IRS guidance on employer responsibilities.)
  • Missing state-specific rules such as disability insurance, paid family leave, or local taxes.

Professional tips

  • Review employee locations at least quarterly and on any hiring change.
  • Build an internal checklist for new hires that includes state registration triggers and required documents (W-4, state equivalents, I-9, W-9/W-8).
  • Engage a CPA or multistate payroll specialist when entering new states. In my practice, early consultation cut a client’s multistate filing costs by half and avoided late-registration penalties.

Tools, next steps, and where to learn more

  • Set up a living spreadsheet or HRIS report with employee state, start date, and payroll tax accounts.
  • Choose a payroll vendor with multistate expertise.
  • For deposit schedules and federal rules, consult IRS Publication 15 and the EFTPS site. For nonresident withholding, consult IRS Publication 515.

Internal links

Authoritative sources

Disclaimer

This article is educational and not individualized tax advice. Rules vary by state and fact pattern; consult a CPA or tax attorney for guidance tailored to your company.