Good morning! A single remote employee in another state can trigger withholding registration, unemployment insurance, workers’ comp, and sometimes corporate income tax exposure … all before that employee finishes setting up their Slack profile.

This week’s lineup:

🗺 One out-of-state remote hire = a full set of new state registrations.
🧭 Reciprocal agreements simplify some pairs of states. Most don’t qualify.
🧨 A single remote employee can create corporate income tax nexus for the whole business.
📋 Free this week: the multi-state hiring compliance checklist every employer needs in 2026.

The Basics

🗺 Hiring across state lines? You just made yourself a multi-state employer

Image from Envato

The Quick & Bristly: The day you hire a remote worker in another state, you become a tax presence there. Withholding, unemployment insurance, and sometimes a few surprise registrations follow. Here’s what kicks in and when.

There is a sense of optimism that accompanies hiring your first remote employee. The interview goes well. The salary works for both sides. They live in another state, which is fine because everyone works remotely now and the internet doesn’t care about borders. You send the offer. They accept. You feel briefly like a real company.

What you have also done, without being told and possibly without realizing it, is establish payroll nexus in a state you may have never visited.

Nexus is the tax word for “you have a connection here strong enough that we can tax you.” For sales tax, it usually requires a sales threshold. For payroll, it requires almost nothing. A single employee working from their home in another state is generally enough. The state where your employee lives and performs the work has authority over the wages they earn there, and that authority comes with paperwork attached.

What this means in practice for one out-of-state hire:

State income tax withholding registration with the employee’s state department of revenue. You’re now collecting their state’s income tax from their paycheck and remitting it on their schedule, which is rarely the same as your home state’s.
State unemployment insurance (SUTA) registration with the employee’s state workforce or labor agency. Each employee is taxed under the rules of the state where they work, not the state where you’re headquartered.
Workers’ comp coverage under the rules of the employee’s state. Your existing policy may not extend automatically, and most states require coverage from the first employee.
State-specific paid leave or disability programs, which are active in nine states and the District of Columbia and have their own withholding rules.

A few states are easier than others. Some have reciprocal agreements that let employees pay tax only in their resident state. A handful (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) have no state income tax at all, which trims the withholding step but not the unemployment or workers’ comp steps.

The federal side, mercifully, doesn’t change. EIN, Form 941, FICA, FUTA … all the same regardless of where the employee lives.

The state side is the part that catches people. And it catches them most often when they hire one person in one state and then quietly grow into hiring people in four more without doing the registrations along the way.

👉 IRS Hiring Employees resource page

PRESENTED BY REMOTE

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And a withholding registration.

And unemployment insurance.

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True or False: If your business is based in Florida (no state income tax) and you hire a remote employee who lives and works in Georgia, you don’t have to withhold any state income tax because your business isn’t subject to one.

(Find the answer at the end of this newsletter)

The Strategy

🧭 Reciprocity, convenience rules, and the two states that want your withholding

Photo from Unsplash

The Quick & Bristly: Multi-state withholding gets weird fast. Reciprocal agreements simplify some pairs of states. “Convenience of the employer” rules complicate others. Here’s how to figure out which state actually gets the tax.

Once you’ve registered everywhere you need to register, the next question is whose income tax you’re actually withholding. This sounds like it should have a straightforward answer. It does not.

The general rule, when it applies cleanly, is that an employee owes income tax to the state where they physically perform the work. So if you’re a Texas company and you hire someone who lives and works in Colorado, you withhold Colorado income tax. Texas, having no income tax, has nothing to ask for. Colorado, having one, does.

But several wrinkles complicate this.

Reciprocal agreements between certain pairs of states let an employee pay income tax only in their state of residence, regardless of where the employer is. There are about 16 of these in effect, including pairs like Pennsylvania/New Jersey, Illinois/Wisconsin, Virginia/D.C., and a handful of Midwest combinations. Both states have to agree, the employee usually has to file a non-residency certificate with their employer, and the agreement only covers wages, not other income.

“Convenience of the employer” rules go the opposite direction. A small number of states, including Alabama, Connecticut, Delaware, Nebraska, New Jersey, New York, Oregon, and Pennsylvania, assert that if a remote employee is working from home for the employee’s own convenience rather than the employer’s, the employer’s state can tax that income, too. The result is occasional double withholding for employees who live in one state and work remotely for an employer in another, with the employee left to chase a credit on their resident return.

Local taxes add a third layer. Cities like New York City, Philadelphia, and several others impose local income taxes that have to be withheld separately. Ohio’s municipal tax structure is famously baroque and worth its own consultation.

The practical move when you hire across state lines:

Confirm the employee’s resident state and primary work location in writing on day one
Check whether a reciprocal agreement applies between the two states (many states publish a clean list)
Have the employee complete both their resident state’s withholding form and any non-residency certificate the agreement requires
Identify any “convenience of the employer” exposure before payroll runs, not after
If a payroll service handles your withholding, verify it actually supports the relevant states. Some smaller services do not.

Multi-state payroll software has gotten dramatically better in the last few years. The rules underneath it have not gotten any simpler. The software just hides the complexity until something goes wrong.

👉 Federation of Tax Administrators state tax agency directory

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The Deep Dive

🧨 The hidden income tax nexus most multi-state employers don’t see coming

Image from Evanto

The Quick & Bristly: A remote employee in another state can do more than create payroll obligations. They can create corporate income tax nexus, sales tax nexus, and franchise tax exposure for the entire business. Here’s how that happens.

The payroll obligations of multi-state hiring are well-known enough that they’re at least visible in advance. The corporate tax obligations are the part that arrives months later, in a letter, often after the affected business has been operating in violation for a while without realizing it.

Every state that has a corporate income tax (which is most of them) defines what creates nexus for that tax. The traditional standard required physical presence, an office, a warehouse, employees actually showing up somewhere. Then South Dakota v. Wayfair happened in 2018 for sales tax, and shortly after, state revenue departments started applying broader nexus thinking to income tax as well.

The current reality, in most states: a single employee working remotely from within a state’s borders is enough to create corporate income tax nexus for the employer.

What that nexus triggers depends on the state and the entity type:

State corporate income tax filings. Even if your business is an LLC or S-Corp where the income flows through to owners, many states impose a separate entity-level filing requirement, and several impose franchise taxes or minimum fees regardless of profitability.
Apportionment of income. A portion of your business’s total income, calculated by formulas involving sales, payroll, and property in that state, becomes taxable to that state. Even if the employee in question represents one-thirtieth of your operations, the apportionment math still applies.
Sales tax economic nexus reassessment. Having an employee in a state can also create physical sales tax nexus on top of any economic nexus exposure, retroactive to the date of hire.
State business registration requirements. Several states require formal registration as a “foreign entity doing business in the state” once you have an employee there. The fees are modest. The penalties for skipping the registration are not.

There is some federal protection. Public Law 86-272 prevents states from imposing income tax on out-of-state businesses whose only in-state activity is soliciting orders for tangible personal property. But the protection is narrow. It does not apply to services. It does not apply to digital products. It does not apply to any in-state activity beyond solicitation.

And the Multistate Tax Commission revised its interpretation of P.L. 86-272 in 2021 to exclude most modern internet activities, which several states have since adopted.

For a small business with one or two remote employees in other states, the practical exposure is usually manageable but rarely zero. The defensible move is to evaluate it deliberately rather than hope it doesn’t apply:

Inventory every state where you currently have an employee
Identify each state’s nexus standard for corporate income tax
Determine whether you’ve crossed the threshold and for how long
If you’re already over and unregistered, evaluate voluntary disclosure programs before the state finds you. Most states offer reduced lookback periods and waived penalties for businesses that come forward voluntarily. Once you’re contacted first, those terms disappear.

The window for clean compliance is the period before the state knows you exist. For a business hiring its first or second out-of-state employee, that window is still open.

👉 Multistate Tax Commission Voluntary Disclosure Program

Freebie

🗂 The 2026 multi-state hiring compliance checklist

Image from Evanto

Everything in today’s issue, turned into a step-by-step action list. Every state registration, withholding rule, and nexus question, in order, before your next out-of-state hire.

Download the Free 2026 Multi-State Hiring Compliance Checklist →

📖 Read: How Are Remote & Hybrid Workers Taxed? – Tax Foundation Clear walkthrough of how state tax obligations follow remote workers across state lines, including the convenience-of-the-employer rules and how policy is shifting in response to remote work.
🛠 Use: Federation of Tax Administrators State Tax Agency Directory. Direct links to every state’s department of revenue and workforce agency in one place. The fastest way to find the right registration portal when you hire across state lines.
🎙 Listen: The Deduction (Tax Foundation) — “You Might Owe Taxes in a State You Don’t Live In.” Katherine Loughead breaks down the patchwork of state nonresident income tax laws, why convenience-of-the-employer rules in eight states create double-taxation traps, and what reforms could simplify the mess. Plain-language and current.
🚀 Try: Get your free compliance score from Harbor Compliance and find out whether your licenses, registrations, and filings are actually as clean as you think (sponsored).

Answer: ❌ False!

Your business’s home state is irrelevant to your withholding obligation for that employee. Georgia taxes the wages earned by people working within its borders, and you (as the employer) are responsible for registering with Georgia, withholding Georgia income tax from the employee’s paycheck, and remitting it on Georgia’s schedule. The fact that Florida has no income tax doesn’t carry over. State payroll obligations follow the employee, not the employer.

You're reading an archived edition of TaxStache.

🧭 The state your remote hire lives in wants their cut