Remote Hires and State Tax Nexus: Payroll, Income, Sales Obligations You Must Consider

US State Tax Nexus: Understanding Your Remote Employee Impact

The decision to hire your first out-of-state remote employee feels like a win. You found the right talent, regardless of location. But this single hire quietly triggers a cascade of new state tax obligations that can surprise even experienced founders. Suddenly, your company may have a legal requirement to register, file, and pay taxes in a state where you have no office, no customers, and no other connection. For a pre-seed or Series B startup where every dollar of runway counts, these unexpected costs represent a real threat to your financial forecasts.

These compliance burdens are more than just administrative headaches. They introduce direct costs, consume valuable founder time, and create risks that can surface during financial due diligence. Failing to manage your remote employee state tax obligations can lead to penalties, back taxes, and complicated remediation projects down the road.

This guide breaks down the complex world of state tax nexus into a clear, actionable framework. It is not about becoming a tax expert. It’s about protecting your cash, making informed decisions, and building a scalable compliance foundation for your growing team.

The Three Layers of Remote Employee Tax Compliance

Think of your new multi-state tax footprint as three distinct layers of compliance, each with its own trigger and urgency. The first is immediate and tied to your employee. The second is annual and tied to your company. The third is situational and often tied to your business model. Managing your remote team tax implications requires addressing each one at the right time.

Layer 1: The Immediate Obligation - State Payroll Tax

This is your first and most urgent responsibility. As soon as you hire an employee in a new state, you must establish payroll tax accounts there before you can legally run their first payroll. This is a non-negotiable first step. The core principle is straightforward: “Payroll tax obligations are almost always based on where the work is physically performed.” This means you must withhold state and local income taxes from the employee’s paycheck and pay state unemployment insurance (SUI) taxes in the state where they are located, not where your company is headquartered.

Ignoring multi-state payroll compliance exposes your company to significant penalties for failure to withhold and remit taxes, plus interest on the unpaid amounts. States take this seriously because these funds support state services that your employee uses. If you discover past unregistered activity, consider a voluntary disclosure program, which can limit penalties and provide a structured way to become compliant.

Consider a SaaS startup headquartered in Delaware that hires its first remote engineer in Colorado. To comply with its out-of-state employee tax requirements, the founder must complete two key registrations:

1. Register for a State Withholding Account: The company must register with the Colorado Department of Revenue to receive a state withholding account number. This registration allows the company to legally remit the state income tax collected from the employee’s wages.
2. Register for a State Unemployment Insurance (SUI) Account: The company must also register with the Colorado Department of Labor and Employment for an SUI account number. This is for paying state unemployment taxes, which are a direct expense to the company, not the employee.

Modern payroll platforms like Gusto or Rippling can often assist with these registrations, but the ultimate legal responsibility remains with your company. You must have these accounts active and the information entered into your payroll system to process the employee’s first paycheck correctly. This is your most immediate set of remote worker state taxes.

Layer 2: The Annual Obligation - Corporate Income and Franchise Tax Nexus

While payroll tax is about your employee, this layer is about your company's direct tax obligation to the new state. Hiring an employee in a state creates what is known as nexus. Nexus is a legal term for having a significant enough connection to a state that it can subject your business to its tax laws. For state tax purposes, a remote employee is almost always considered a physical presence.

The threshold for creating this physical presence is surprisingly low. According to the Bloomberg Tax Annual Survey of State Tax Departments, “A single remote employee is sufficient to create corporate income and franchise tax nexus in nearly all of the 45 states that have such a tax.” Critically, the survey also notes, “There is generally no revenue minimum for physical presence nexus created by an employee.” This means the obligation exists from day one, regardless of your sales volume.

The consequence is straightforward: your company must now file an annual corporate income or franchise tax return in that employee's state. You will not be taxed on 100% of your company’s income in the new state. Instead, states use a process called apportionment to determine what portion of your income is subject to their tax. This is typically based on a formula involving your property, payroll, and sales in that state relative to your totals everywhere.

A scenario we repeatedly see is a pre-revenue deeptech or biotech startup hiring a researcher in a new state. Even with zero revenue and no overall profit, the company may now have a filing obligation and owe minimum taxes. These fixed annual costs can add up. For instance, “Examples of state minimum corporate taxes include $800 in California and ~$300 in Delaware.” This is a direct hit to your cash forecast that must be budgeted for.

Layer 3: The Situational Obligation - Sales Tax Nexus

Sales tax is the most situational of the remote worker state taxes. Unlike payroll or income tax, nexus is not automatically triggered by every remote hire. However, an employee's presence can create a sales tax collection requirement, and it is critical for e-commerce, SaaS, and professional services companies to understand how.

There are two primary ways a business can create sales tax nexus:

• Economic Nexus: Established by the landmark South Dakota v. Wayfair Supreme Court ruling, this type of nexus is not based on physical presence. Instead, it is triggered by your volume of sales into a state. The thresholds are generally high enough that many early-stage startups do not meet them. As a general rule, “Economic nexus thresholds for sales tax, established by the Wayfair ruling, are typically $100,000 in sales or 200 transactions.”
• Physical Presence Nexus: This is where your remote employee comes back into the picture. Having an employee in a state, particularly one involved in sales, service delivery, or customer support, can create physical presence nexus for sales tax purposes. Unlike economic nexus, this type of nexus often has no minimum sales threshold. Your company could be required to register, collect, and remit sales tax from your very first dollar of taxable sales into that state.

For a B2B SaaS company, this distinction is vital. If you hire a software developer in Texas, their work likely will not create sales tax nexus. But if you hire a sales representative in Texas, their activities almost certainly will. This is where the layers of compliance interact, as a single sales hire can trigger payroll, income, and sales tax obligations simultaneously, multiplying the administrative burden.

A Pragmatic Action Plan for Startups

The reality for most Pre-seed to Series B startups is more pragmatic: you cannot solve every potential tax issue at once. The key is to prioritize based on risk and urgency. Here is a simple framework for addressing your new remote employee state tax obligations.

What to Do Now (First Week)

1. Confirm and Document Employee Location: Your first step is to confirm the employee’s primary work address. This address is the foundation for all state-level compliance. Make this a formal part of your onboarding process, asking the employee to sign a document confirming their work location.
2. Initiate Payroll Registration Immediately: This is your highest priority. You cannot pay your new employee correctly without being registered for withholding and unemployment taxes in their state. Immediately contact your payroll provider (like Gusto or Rippling) or your accountant to begin the registration process. It can sometimes take several weeks to receive account numbers, so do not delay.

What to Plan For (Next 90 Days)

1. Notify Your Accountant or Tax Advisor: Your accountant needs to know about this change to plan for future tax filings and advise on potential liabilities. This does not need to be a complex conversation. Sending a simple, clear email is the perfect next step.

Example Email Template:
Subject: New Hire in [State] - Tax Nexus Question
Body: Hi [Accountant Name], We've just hired our first employee in [State], starting [Date]. They will be working remotely from their home. Can you help us understand our new payroll, income/franchise, and potential sales tax obligations there? We want to get ahead of this. Thanks, [Founder Name].

1. Budget for Minimum Taxes and Compliance Costs: Based on your advisor’s feedback, add any state minimum franchise or income taxes to your cash flow forecast. For a startup focused on runway, knowing about an extra $800 annual tax cost for a California employee matters. Also, budget for any increased accounting fees for the new state filing.

What Can Wait (For Now)

• Complex State Apportionment Modeling: In the early days, you do not need a detailed analysis of how your income will be apportioned. Your accountant will handle the specifics when they prepare your annual tax returns. The key is to have them aware of the filing requirement itself.
• Dedicated Sales Tax Software: Unless your new hire is in a sales role and you immediately begin selling into their state, you can likely wait to implement tools like Avalara or TaxJar. Monitor your sales activity against both physical and economic nexus rules, and invest in a solution when you approach the relevant thresholds.

For broader guidance on managing a distributed workforce, including payroll and expatriate issues, see the global mobility hub.

Frequently Asked Questions

Q: Do 1099 contractors create state tax nexus like employees do?
A: Sometimes, yes. While the rules are more complex, a contractor performing duties on your behalf can still create physical presence nexus for income and sales tax. The nature of their work and their relationship with your company matters. It is a common misconception that using contractors automatically avoids these state tax obligations.

Q: What happens if my remote employee moves to a new state?
A: If an employee moves, you must treat it like hiring a new employee in the new state. You will need to register for payroll taxes in their new location and potentially update your income and sales tax nexus footprint. This highlights the importance of having a clear remote work policy that requires employees to notify you of any planned moves in advance.

Q: How long does it take to register for state payroll taxes?
A: The timeline varies significantly by state, from a few days to over a month. Because you cannot legally pay an employee without these registrations in place, you should start the process as soon as the employment offer is signed. This avoids delays to their first paycheck and ensures compliance from day one.

Q: Do I also need to worry about city or local payroll taxes?
A: Yes, in some locations. States like Pennsylvania, Ohio, and New York have numerous local jurisdictions with their own income tax withholding requirements. Your payroll provider can typically help identify and manage these, but it adds another layer to your multi-state payroll compliance obligations.