Remote employees in another state: payroll and tax registration

Remote hiring lets a small business recruit anywhere, but each new state brings its own payroll registrations and rules. Getting it right from the first paycheck avoids penalties and back taxes. This guide covers what changes when an employee works in another state.

By Awais Jameel, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

When you hire a remote employee in another state, you generally register there for income tax withholding and state unemployment tax, withhold that state's tax and follow its labor rules, such as minimum wage, paid leave and new hire reporting. Some neighboring states have reciprocity agreements. An employee there can also give the business nexus for that state's taxes.

At a glance

Withholding
Usually the state where the employee works
Unemployment tax
Usually the work state
Reciprocity
Some neighboring states agree to tax by residence
Local taxes
Some cities and counties too
Labor rules
Minimum wage, leave, new hire reporting
Business taxes
An employee there can create nexus
Remote employees in another state: payroll and tax registrationSteps: 1. Confirm where the employee will work; 2. Register in that state; 3. Update payroll; 4. Check labor rules; 5. Review business tax nexus.THE PROCESS AT A GLANCERemote employees in another state: payroll and taxregistration1Confirm where theemployee willworkTheir address and anytravel2Register in thatstateWithholding,unemployment and anylocal taxes3Update payrollWith the state'swithholding form andrates4Check labor rulesMinimum wage, overtime,pay frequency, leaveand final pay rules5Review businesstax nexusIncome, franchise andsales tax registrationsChecked against official sourcesTax BakersRemote employees in another state: payroll and tax registrationSteps: 1. Confirm where the employee will work; 2. Register in that state; 3. Update payroll; 4. Check labor rules; 5. Review business tax nexus.THE PROCESS AT A GLANCERemote employees in another state:payroll and tax registration1Confirm where the employee willworkTheir address and any travel2Register in that stateWithholding, unemployment and any localtaxes3Update payrollWith the state's withholding form and rates4Check labor rulesMinimum wage, overtime, pay frequency, leaveand final pay rules5Review business tax nexusIncome, franchise and sales taxregistrationsChecked against official sourcesTax Bakers
The process at a glance: 1. Confirm where the employee will work; 2. Register in that state; 3. Update payroll; 4. Check labor rules; 5. Review business tax nexus.

Which state taxes a remote employee?

Generally the state where the employee physically works, which for a remote employee is where they work from home. Their home state taxes residents on all income in any case. A few states apply a convenience of the employer rule, taxing non-residents who work remotely for an employer based there unless the remote work is required by the employer; New York is the best-known example.

Ask new hires to confirm their work address in writing.

What must you register for?

RegistrationWith
State income tax withholdingThe state revenue department, if the state has an income tax
State unemployment insuranceThe state workforce agency. See state unemployment tax registration
Local income or payroll taxesSome cities and counties, for example in Ohio and Pennsylvania
New hire reportThe state's new hire reporting center
Workers' compensationCoverage valid in that state
Paid leave or disability programsWhere the state runs one

Register before the first payday where possible, since some states apply penalties for late registration.

What is reciprocity?

An agreement between neighboring states that lets employees who live in one and work in the other pay income tax only to their home state, by filing an exemption certificate with the employer. It matters mainly for commuters, but check it whenever an employee lives and works in different states.

Keep the signed exemption certificate in the employee's payroll file, and update payroll if the employee moves.

How do you set it up?

  1. Confirm where the employee will work

    Their address and any travel.

  2. Register in that state

    Withholding, unemployment and any local taxes.

  3. Update payroll

    With the state's withholding form and rates.

  4. Check labor rules

    Minimum wage, overtime, pay frequency, leave and final pay rules.

  5. Review business tax nexus

    Income, franchise and sales tax registrations.

Can one employee create business tax obligations?

Yes. An employee working in a state is a physical presence there, which can create nexus for that state's income or franchise tax and its sales tax, depending on the state's rules and the employee's activities. Some states and federal law give limited protection for businesses whose only activity is soliciting sales of goods, but many remote roles fall outside it. See physical vs economic nexus and how states tax LLCs.

What does an example look like?

A Texas LLC hires a designer who lives and works from home in Colorado. Texas has no state income tax, but Colorado does, so the business registers with Colorado for withholding and unemployment insurance, withholds Colorado income tax, reports the new hire there, and follows Colorado's paid leave and pay rules. It also checks whether having an employee in Colorado means it must file a Colorado income tax return or register for Colorado sales tax.

Should you use a PEO or employer of record?

A professional employer organization or employer of record can handle registrations, payroll and compliance in states where you have few employees, for a fee. It reduces the payroll burden, but the business tax nexus question can remain. Payroll software providers also handle multi-state withholding once you register.

What about employees outside the US?

A worker living abroad is generally outside US payroll rules for work done abroad, but the employee's country may require local payroll registration. Many businesses use contractors or an employer of record there. See paying foreign contractors.

Hiring someone in another state?

We register you in the employee's state, set up payroll withholding and unemployment tax, and check what else the new state requires.

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Questions people ask

Which state do I withhold taxes for a remote employee?

Usually the state where the employee works from, unless a reciprocity agreement or special rule applies.

Do I need to register in the remote employee's state?

Usually yes, for income tax withholding if the state has one, and for state unemployment tax.

Does a remote employee create nexus for my business?

Often yes, for that state's income, franchise or sales taxes, depending on its rules.

What is a convenience of the employer rule?

A rule in a few states, such as New York, that taxes remote non-residents working for an employer there unless remote work is required.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS: State government websites
  2. U.S. Department of Labor: State unemployment insurance tax information
  3. U.S. Department of Health and Human Services: New hire reporting

Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.

Payroll and contractorsState unemployment tax: how to registerPayroll and contractorsHiring your first employee: registrations and formsSales tax basicsPhysical nexus vs economic nexus

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This guide is general information. It is not tax or legal advice for your situation.