Remote hiring makes every new employee a potential new state. Each one brings payroll registrations, withholding rules, unemployment insurance, sometimes local taxes, and often a new income tax filing for the company. None of it is hard individually; missing it is expensive.
The checklist for a new state
| Step | Notes |
|---|---|
| Register for state withholding | With the state's revenue department, if the state has an income tax |
| Register for state unemployment insurance | With the state's labor or workforce agency; a new-employer rate applies at first |
| Register for local taxes if applicable | Cities and counties in states such as Ohio, Pennsylvania and New York, among others |
| Qualify to do business | Often required once employees work in the state |
| Workers' compensation | Coverage that includes the new state |
| State paid leave and disability programs | Several states run their own programs with payroll contributions |
| New-hire reporting | Each state requires employers to report new hires |
| Required notices and posters | Usually delivered electronically to remote staff |
Which state's tax applies
- Withholding generally follows where the employee physically works. An employee living and working in Colorado for a Delaware corporation headquartered in California is generally subject to Colorado withholding.
- Reciprocity agreements between some neighboring states let employees pay tax only to their state of residence.
- Convenience-of-the-employer rules in a few states, including New York, can tax a nonresident employee working remotely for an in-state employer as if the work were done in that state, when remote work is for the employee's convenience.
- Unemployment insurance follows localization tests: generally the state where the work is localized, then base of operations, then direction and control.
Federal filings stay the same
Federal income tax withholding, Social Security and Medicare are reported on Form 941 quarterly and federal unemployment tax on Form 940 annually, regardless of how many states are involved.
The income tax effect
An employee in a state is usually enough to create corporate income tax nexus there. Hiring in a new state should trigger a review of the company's income and franchise tax filings, not just payroll.
A worked example
A company with 25 people adds five remote hires in Texas, Washington, Ohio, Pennsylvania and New York.
| State | Income tax withholding | Notable extras |
|---|---|---|
| Texas | None | Unemployment insurance; franchise tax review |
| Washington | None | Paid family leave and long-term care premiums; B&O tax review |
| Ohio | Yes | Municipal income tax by locality |
| Pennsylvania | Yes | Local earned income tax |
| New York | Yes | Paid family leave, disability insurance; New York City tax if living there |
Keeping it right
- Record each employee's work location in the HR system and update it when people move.
- Require notice before an employee relocates or works from another state for an extended period.
- Reconcile payroll tax filings quarterly against the payroll register.
- Review state registrations annually and close accounts that are no longer needed.
We run payroll compliance alongside the books, review registrations with every new hire and move, and reflect payroll footprint in the state tax filings.
Sources
- IRS, Publication 15, Employer's Tax Guide
- IRS, About Form 940
- IRS, Understanding employment taxes
- U.S. Department of Labor, State labor offices
- IRS, State government websites
Questions founders ask
Does hiring one remote employee in a new state require registration?
Generally yes. An employer usually registers for withholding and unemployment insurance in each state where it has employees working, and may also need to register to do business there.
Can a PEO or employer of record handle this?
They can run registrations and filings, and many startups use one. The company still needs to know where its people work, because it affects income tax nexus and benefits.
