Let’s face it: remote work is here to stay. It’s flexible, it widens your talent pool, and your employees love it. But there’s one caveat: hiring remote workers in multiple states creates a nexus nightmare if you’re not prepared, especially when dealing with remote worker taxes.

Whether you’re onboarding a single employee in another state or building a fully remote team across the country, here’s what you need to know about how remote work can affect your state and local taxes.

What is nexus? (And why should you care?)

Nexus is a fancy word for “connection,” and in the world of taxes, it determines whether your business has a sufficient presence in a state to be subject to its tax rules.

There are two main types to watch for:

• Physical nexus is based on tangible presence, like having an office, warehouse, or employees in a state. While there are a few exceptions, having an employee in the state typically counts.
• Economic nexus is based purely on your sales activity in a state, regardless of whether you (or an employee) have ever set foot there. Many states set a threshold, such as $100,000 in sales or 200 transactions per year. If you exceed the threshold, you may be required to collect and remit sales tax, even if you have no physical presence.

Depending on state rules, having physical and/or economic presence can trigger income tax, payroll taxes, and sales tax obligations in the state.

In other words, one employee working from a laptop in another state—sometimes even temporarily—can establish nexus for your business in that state, potentially subjecting you to new income tax filings, payroll liabilities, and sales tax collection requirements, even if you don’t have any customers in that state.

Paying taxes isn’t just about where your office is anymore; it’s about where your people are.

Income taxes: where you earn versus where you work

When you’re dealing with income tax in multiple states, it’s not just about whether you owe. It’s also about where you earn that income. This is where income sourcing rules come into play, and (surprise!) not all states play by the same rules. Some states use market-based sourcing, while others use cost-of-performance sourcing. Knowing which applies can make a big difference in how much state income tax you owe, and where.

Market-based sourcing states assign your income to the location of your customer. Say your business is in New York, but you’re selling virtual consulting services to a client in California. Both New York and California are market-based sourcing states, so California has the right to tax that revenue.

On the other hand, cost-of-performance sourcing looks at where your employees actually perform the service. So, say you have an employee in Texas (a performance-based state) providing remote consulting services to a client in California (a market-based state). Both states claim the right to tax that revenue. The overlap can result in double taxation or underreporting if you incorrectly assume only one state applies.

But wait! There’s more: throwback rules. In states with throwback rules, when you sell tangible property that isn’t taxed in its destination, the sale is “thrown back” into the state where the sale originated.

For example, say you’re an online retailer located in California (a throwback state) and make a sale in South Dakota, which doesn’t have a state income tax. You might think you don’t have to pay state income taxes on the sale in either state. But California requires you to “throw back” this income into your state income tax calculation there.

If this sounds impossibly confusing, that’s because it is.

Payroll taxes: Remote worker taxes follow the employee

Payroll taxes don’t care where your business is based. They follow the employee: where they live, work, and get paid. So if you hire a remote employee who works from their home in Illinois, you must:

• Register for Illinois state payroll taxes
• Withhold payroll taxes at Illinois tax rates
• Contribute to Illinois unemployment insurance and other state programs

Failing to do this isn’t just a paperwork issue. It can result in audits from state and local governments, owing back payroll taxes, penalties, and interest.

Don’t count on your payroll software to magically handle this. You may need to manually register in each new state and configure your payroll system correctly to comply.

Remote workers and sales tax nexus

Having an employee working in a state can trigger physical nexus for sales tax purposes. If you meet the physical nexus requirements, economic nexus thresholds are irrelevant—you likely have an obligation to register and collect sales taxes in the state.

You might think sales tax only applies if you sell tangible goods. But many states are expanding their tax bases to include services and digital products.

A remote employee answering support calls in a state where you have customers might be enough to tip the scale and require sales tax collection. If you’re selling products or services across multiple states and have team members scattered around the country, it’s time to revisit your sales tax map.

State registration and business compliance

Beyond state and local taxes, some states require you to register your business as a foreign entity just for having an employee working there. This can include:

• Registering with the Secretary of State
• Appointing a registered agent
• Filing annual reports
• Paying state-specific fees or franchise taxes

Each state has its own definition of what constitutes “doing business,” so unfortunately, there’s no one-size-fits-all checklist.

What should you do now?

Before you panic or decide to make everyone work from a single ZIP code, take a deep breath. Here’s how to stay compliant (and sane):

1. Track where your employees are located. You can’t comply with what you don’t know. Keep an up-to-date record of where every employee lives and works, including those who relocate mid-year.
2. Register for payroll and income tax withholding in each state where you have employees. Each new employee location may require a new registration. Don’t assume your payroll provider will handle this automatically.
3. Evaluate income and sales tax nexus regularly. Hiring, sales volume, and other activities can trigger new filing obligations. A nexus review from your accountant or tax advisor can help you determine where you have state and local tax liability.
4. Check for foreign entity registration requirements. You may need to register your business in each state where you have remote employees, even if you don’t sell anything in that state.
5. Stay on top of state-specific rules. States are constantly updating their remote work and tax policies. What applied last year might have changed this year. It’s a good idea to work with an accountant who stays on top of changing state and local tax laws. They can let you know when laws change and explain the tax implications of decisions like hiring out-of-state workers or opening a new store outside of your metro region.

Remote work opens up exciting opportunities for businesses and workers alike, but it also comes with some tangled tax consequences. If you’re hiring across state lines, don’t assume it’s “set it and forget it.” Reach out to Countless for help. We’ve been a remote-first accounting firm since 2016, with employees in eight states and clients in more than twenty-five. About 20% of our clients have multi-state tax issues, so we know this landscape well. We’re experts in navigating the tax implications of remote work and can help you stay compliant while scaling confidently.