Quick summary

Remote-first startups must juggle federal payroll rules, worker classification, state withholding and registration, sales-and-use or digital product taxes, and clean recordkeeping. Failing to register or withhold correctly can create back taxes, penalties, and interest. This article gives practical steps, real-world context from advising startups, regulatory sources, and an operational checklist you can apply immediately.

Why remote work changes the tax map

When employees, contractors, or customers live in different states (or countries), tax obligations often follow their location. Wage withholding, unemployment insurance, and state employment taxes are frequently triggered by an employee’s work state. Similarly, sales tax or gross receipts taxes for SaaS and digital services depend on customer location and state rules. The result: a small remote team can create multi-state compliance requirements overnight (IRS guidance; SBA guidance).

In my practice working with early-stage startups, the most common outcomes are: missed state registrations for payroll, late 1099 reporting for contractors, and unanticipated sales-tax exposure for digital products. Address these with a short-term compliance roadmap (see checklist below).

Core compliance areas and practical actions

1) Choose and document the right business structure

  • Why it matters: Entity type (LLC taxed as sole proprietorship, partnership, S corp, or C corp) shapes federal return forms, owner tax treatment, and some state-level filing obligations. Consult the SBA’s guidance on business structures for basics and state-specific filing steps (SBA).
  • Action steps:
  • Confirm entity election and retain the paperwork (state Articles of Organization/Incorporation; any S-election acceptance letter from the IRS).
  • Ensure accounting software tracks owner distributions vs payroll for owners who are active in the business.

2) Obtain and maintain an EIN and appropriate tax accounts

  • Why it matters: Most businesses need an Employer Identification Number (EIN) to file payroll and business returns and to open bank accounts. Apply early (IRS — Apply for an EIN, Form SS-4).
  • Action steps:
  • Apply online for an EIN via the IRS website when you hire anyone or open business bank accounts. Keep the EIN documentation in your compliance folder.
  • Use the EIN on all business tax returns and payroll tax filings; do not share it unnecessarily.

Relevant internal guidance: see our explainer on Taxpayer Identification Numbers for how EINs interact with SSNs and ITINs (Taxpayer Identification Numbers Explained: SSN, ITIN, and EIN).

3) Classify workers correctly: employees vs. independent contractors

  • Why it matters: Misclassification leads to back payroll taxes, unemployment tax, penalties, and fines. The IRS evaluates classifications using behavioral, financial, and relationship factors; Form SS-8 can resolve disputes (IRS — Independent Contractor (Self‑Employed) or Employee?).
  • Action steps:
  • Map each person’s role against IRS factors (control over how and when work is done; who supplies tools; payment method).
  • Use written contracts that reflect actual working arrangements and avoid boilerplate language promising contractor status if behavior points to employee treatment.
  • Run periodic spot audits—if a contractor’s hours, tools, or reporting changes, re-evaluate classification.

4) Register for state payroll accounts where required

  • Why it matters: States require withholding registration once you have employees working within their borders. Each state sets rules for when a business has to register—often tied to payroll, physical presence, or economic nexus.
  • Action steps:
  • Maintain a live roster of employee work locations (home address + primary work state). Update onboarding and HR forms immediately when a team member moves.
  • Check state revenue or labor department registration requirements as soon as you hire in a new state. When in doubt, register proactively; registration is usually faster and cheaper than resolving compliance failures later.
  • Consider a payroll provider that supports multi-state withholding and filings.

5) Set up compliant payroll and payroll tax filing

  • Why it matters: Federal forms like Forms 941 (quarterly payroll tax) or 944 (annual employer’s return for small employers) and state unemployment/withholding filings impose schedules and deposit rules. Late deposits trigger penalties and interest (IRS — Forms 941/944; Publication 15, Employer’s Tax Guide).
  • Action steps:
  • Work with a payroll provider that handles federal deposits, garnishments, and state filings in all jurisdictions where you have employees.
  • Maintain a tax calendar with deposit frequencies and return due dates. Automate reminders and reconciliations each payroll cycle.

6) Sales tax and nexus for SaaS, platform, and digital products

  • Why it matters: Many states tax digital goods, subscriptions, or SaaS differently. Nexus can be economic (based on sales thresholds) or physical (an employee, server, or agent in the state). States’ rules diverge widely.
  • Action steps:
  • Inventory what you sell and where your customers are located. Closely review rules for the top states where you do business.
  • When thresholds are met, register for sales/use tax and begin collecting and remitting tax. Consider a sales-tax automation tool (e.g., Avalara, TaxJar) for multi-jurisdiction collection.
  • Document position and rate choices; retain exemption certificates for B2B sales.

7) Keep organized records and run quarterly tax reviews

  • Why it matters: Good records reduce audit time, support tax elections, and speed up any tax controversy resolution.
  • Action steps:
  • Store hiring documents, payroll reports, contractor agreements, invoices, and sales-tax filings in a compliant document repository.
  • Conduct quarterly reconciliation of payroll liabilities, sales tax collected, and state registrations.
  • Hold a quarterly tax checklist review with your CPA or tax advisor.

Real-world examples and lessons learned (practical context)

  • Multi-state payroll surprise: A remote SaaS startup with five developers in three states discovered after a state audit that it had a withholding obligation and unemployment tax liability in two jurisdictions. They negotiated a voluntary disclosure agreement to limit penalties but paid back withholding and employer taxes for the prior year. Lesson: register early and track employee locations continuously.

  • Misclassified contractors: Another early-stage company hired designers as 1099 contractors while providing detailed daily direction and reporting. An IRS audit treated the designers as employees, resulting in unpaid payroll taxes and penalties. Lesson: contracts must match practice; reclassify when work relationships change.

  • Sales tax on subscriptions: A B2B SaaS company assumed subscriptions were not taxable. After examining state rulings, they found several states taxed their product. They retroactively registered and amended returns, incurring filing costs but preventing larger enforcement actions. Lesson: inventory product taxability by state.

Compliance checklist for the first 12 months

  • Apply for an EIN and store the SS-4/confirmation (IRS — Apply for an EIN).
  • Decide and document entity tax elections; obtain a written tax strategy with a CPA.
  • Implement a payroll system capable of multi-state withholding.
  • Create and maintain an employee location tracker in HRIS or payroll software.
  • Classify and document the status of every worker; obtain Form W‑9 for contractors and issue Form 1099‑NEC where required.
  • Review product taxability and register for sales/use tax where you have nexus.
  • Schedule quarterly tax reconciliations with finance and your CPA.

When to bring in help

  • Engage a CPA with multistate expertise before hiring remote workers in new states.
  • Use employment-law counsel for complex classification or contractor‑to‑employee transitions.
  • Consider a sales-tax consultant for SaaS firms with national customer footprints.

Helpful federal resources

  • IRS: Apply for an EIN (Form SS‑4) and EIN information (irs.gov).
  • IRS: Employer’s Tax Guide, Publication 15 (irs.gov/publications/p15).
  • IRS: Independent Contractor (Self‑Employed) or Employee? and Form SS‑8 for classification issues (irs.gov).
  • SBA: Choose your business structure and tax basics for small businesses (sba.gov).

Internal resources

Common pitfalls to avoid

  • Treating a remote location as irrelevant—employee residency can create state tax obligations.
  • Using independent contractor language in contracts without changing operational control.
  • Assuming digital goods are tax-free—states differ on SaaS taxability.
  • Waiting to register—voluntary disclosures are possible but costly.

Final practical notes and professional disclaimer

Implement a recurring tax-playbook review as part of your monthly finance close. In my experience advising startups, short, repeatable processes (employee location checks, contractor audits, and automated payroll deposits) prevent most compliance headaches. This article provides educational information only and does not constitute tax or legal advice. Consult a licensed CPA or tax attorney for guidance specific to your startup’s facts and jurisdictions.

Authoritative sources: IRS (irs.gov), U.S. Small Business Administration (sba.gov), Multistate Tax Commission (mtc.gov) (consult state revenue departments for state-by-state rules).