Navigating Tax Obligations as a Multistate Employer

When Multistate Obligations Arise

You become a multistate employer when you have employees performing work in more than one state. This can happen through obvious means — opening an office in another state — or through less obvious ones, like hiring a remote worker, sending employees to client sites, or having a traveling salesperson covering a territory.

Each state where your employees work may impose withholding requirements, unemployment insurance obligations, and other employment-related taxes on your business.

State Income Tax Withholding

Most states with an income tax require employers to withhold state income tax from wages earned within that state. The fundamental rule is that withholding generally follows the location where the work is performed, not where the employee lives or where the company is headquartered.

However, several complicating factors apply:

Reciprocity agreements. Some neighboring states have reciprocal agreements allowing employees who live in one state and work in another to have taxes withheld only for their state of residence. Examples include the agreements between New Jersey and Pennsylvania, and among several states in the D.C. metropolitan area. Check whether a reciprocity agreement covers your specific state combination.

Convenience of the employer rules. A handful of states, notably New York, tax nonresidents on wages earned while working remotely if the remote work is for the employee's convenience rather than the employer's necessity. This can create withholding obligations even for employees who rarely set foot in that state.

De minimis thresholds. Some states exempt withholding if an employee works fewer than a specified number of days in the state during the year. These thresholds vary significantly.

State Unemployment Insurance

Each state operates its own unemployment insurance (UI) program with its own tax rates, wage bases, and rules. Generally, you must pay state UI taxes in the state where the employee performs services.

If an employee works in multiple states, most states follow a localization test: UI taxes are owed in the state where the majority of work is performed. If work is not localized to any single state, a series of secondary tests under federal guidelines determine the liable state, looking at factors such as the employee's base of operations or the location from which the employer directs and controls the work.

Register for UI in each state where you have an obligation. Failure to register and pay on time results in penalties and can increase your federal UI tax rate by losing the credit offset.

Other State-Level Obligations

Multistate employers must also navigate:

• Workers' compensation insurance in each state where employees work (coverage requirements and approved insurers vary by state)
• State disability insurance (mandatory in California, Hawaii, New Jersey, New York, and Rhode Island)
• Paid family and medical leave programs (operating or enacted in a growing number of states)
• Local payroll taxes in some cities (notably in Oregon, Ohio, Pennsylvania, and others)

Establishing Nexus

Having employees in a state generally creates nexus — a sufficient connection to subject your business to that state's taxes and regulations. This may include not just payroll taxes but also state income taxes on your business entity, sales and use tax collection obligations, and registration and reporting requirements.

Practical Steps for Compliance

1. Map your workforce. Know exactly where every employee physically works, including remote workers. Update this information whenever an employee moves or changes work location.

2. Register in each required state. Obtain employer tax identification numbers, unemployment insurance accounts, and workers' compensation coverage in each state where you have obligations.

3. Configure your payroll system correctly. Your payroll provider needs accurate work-location data for each employee to apply the right withholding rules, tax rates, and wage bases.

4. Monitor employee travel. If employees travel to other states for work, track those days. Some employers use mobile timekeeping tools to record work location.

5. Stay current on law changes. State tax laws change frequently. Assign someone — or engage a payroll provider or tax advisor — to monitor developments in each state where you operate.

Multistate tax compliance is inherently complex, but systematic tracking and competent payroll administration make it manageable. The cost of getting it wrong — back taxes, penalties, and interest across multiple jurisdictions — makes proactive compliance well worth the effort.