Hiring remote employees can be a smart move for your business. After all, you get access to a nationwide talent pool and can hold on to great people who are relocating out of your geographic area. But before you start welcoming new team members from across the country, understand that where your employees work directly impacts where your business owes taxes.

Let’s break down how hiring remote workers can trigger nexus—a fancy term for “you now have a tax obligation in this state”—and what that means for your income taxes, sales tax, payroll tax, and registration requirements.

How Hiring Employees in Multiple States Affects Nexus (And Why You Should Care)

Nexus is the legal connection between your business and a state that gives that state’s tax authorities the right to impose taxes on you. When you hire a remote employee in a new state, it establishes physical presence nexus—one of the most straightforward ways to trigger compliance responsibilities.

The word “nexus” might sound like something out of a sci-fi movie, but it’s really just the starting point of your relationship with a new state’s tax department. And spoiler alert: it’s not always a casual fling.

Income tax nexus: Your new business relationship

In addition to the federal income taxes all businesses pay, having an employee in another state often means your business is now subject to state income tax filing requirements there, even if you don’t sell a single product to customers in that state.

States typically consider having payroll, property, or other business operations within their borders as a sign that your business is operating there. That’s where allocation and apportionment rules come into play. When you file income tax returns, you don’t just file in your home state. You may need to split your income up across multiple states based on where your team is working and where your customers are located.

Plus, many cities and counties have local tax regulations, so you may need to file local income taxes in certain areas.

Translation? More state returns, more complexity, and more opportunity for errors if you’re not tracking it carefully. It can also lead to double taxation if you’re not careful, because many states offer a tax credit for income taxes paid to another state.

Sales tax nexus: It’s not just about what you sell

You might think sales tax doesn’t apply unless you’re selling tangible goods. But even service-based businesses can trigger sales tax nexus in some states when they have employees there.

For example, if your remote worker is engaging in sales activity, customer support, or technical assistance, some states may argue that their activity creates nexus for sales tax purposes. If you’re selling taxable goods or services, you may now be required to collect and remit sales tax in that employee’s state, even if you don’t have any customers there yet.

In other words, hiring a support rep in Ohio might mean you now owe sales tax in Ohio. Surprise!

Payroll taxes for remote employees: Where the employee works matters

Payroll taxes are tied to where your employee actually works, not where your company is based. While federal tax withholding and FICA taxes are the same across the US, state tax withholding changes when you cross state lines.

For example, say you hire remote workers living and working in Colorado. You’ll need to:

• Register with the Colorado Department of Revenue and Department of Labor and Employment
• Pay Colorado state and local minimum wage rates that are substantially higher than the federal government’s minimum wage
• Start withholding payroll taxes, state income taxes, and state disability insurance (SDI) based on Colorado rules and rates
• Pay unemployment taxes (SUTA taxes) and workers’ compensation in Colorado
• Comply with state-mandated paid leave programs
• If employees are located in Denver, Glendale, Greenwood, or Sheridan, open an Occupational Privilege Tax (OPT) account and file OPT returns

The tax laws and rates vary by state, so you need to do this for every new state where you hire, even if the out-of-state workers only work part-time or remotely.

Registration and Compliance Requirements: It’s Not Just About Taxes

Beyond taxes, having out-of-state employees can trigger other legal requirements. For example, you may need to register as a foreign entity with the Secretary of State, purchase workers’ compensation insurance in that state, and comply with state-specific wage and hour laws, like providing meal breaks, following final paycheck rules, or providing break time for nursing mothers.

Each state can have its own rules about pay frequency, meaning how often employees receive their paychecks. For example, while most states require businesses to pay employees at least monthly or semi-monthly, California, Iowa, Massachusetts, Michigan, New Hampshire, New York, Rhode Island, and Vermont mandate weekly paychecks for certain categories of employees.

State laws may also regulate direct deposit practices. Some states allow companies to mandate direct deposit, although you may have to use paycards for employees who don’t have a bank account.

Then there are rules around providing pay stubs. Arizona, Colorado, Connecticut, Hawaii, Iowa, Maine, Minnesota, New Mexico, North Carolina, Texas, and Vermont require employers to provide printed pay stubs or ensure employees can access electronic pay stubs securely and have the ability to print them. Meanwhile, Arkansas, Florida, Louisiana, Mississippi, Nebraska, South Dakota, Tennessee, and Virginia don’t require pay stubs at all.

And don’t forget the state-specific posters and notices you might need to provide, because nothing says “welcome to the team” like laminated labor law signage.

Remote Workers Can Expand Your Tax Footprint

The flexibility of remote work is a major advantage, but it comes with serious compliance considerations. Hiring across state lines means navigating a patchwork of tax and employment laws, and it’s easy to miss something if you’re not careful.

If you’re not sure where you’ve triggered nexus, or you suspect you’re out of compliance in a few states (don’t worry, you’re not alone), reach out to Countless. We stay up to date on relevant laws and can help you understand your tax footprint and make sure you’re registered, compliant, and confident as your remote team grows.