Remote Employees in Other States: The Employer's Checklist
What one employee working from another state creates for the employer — payroll registration, withholding, unemployment, income and sales tax nexus — and how to manage it.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
An employee working from another state generally makes the employer withhold that state's income tax, register for its unemployment insurance, and follow its wage and workers' compensation laws — and often creates income and sales tax nexus for the business there. Each state's rules differ, and a few "convenience of the employer" states can tax the same wages twice.
On this page
What does one remote employee trigger?
| Obligation | Rule |
|---|---|
| State income tax withholding | Generally the state where the work is performed — the employee's home state for a fully remote worker |
| Unemployment insurance | One state, determined by localization rules: where the work is localized, then the base of operations, then the place of direction and control, then the employee's residence — each later test applying only to a state where some work is performed |
| Workers' compensation | Coverage in the state where the employee works |
| Wage and hour, paid leave, pay statements | The employee's state's laws |
| Income tax nexus for the business | Usually created by an employee's presence, though P.L. 86-272 can protect a seller of tangible goods whose employee only solicits orders; income is apportioned there |
| Sales tax nexus | Physical presence through the employee in many states |
| Registration | Withholding account, unemployment account, and often a foreign-entity qualification with the secretary of state |
What is the convenience-of-the-employer rule?
A few states — New York most prominently — treat a nonresident's days working from home for an in-state employer as days worked in the state when the remote work is for the employee's convenience rather than the employer's necessity. New York applies this to employees whose primary office is in New York unless the employer has established a bona fide employer office at the remote location. A Florida resident assigned to a New York office who works from home can owe New York tax on all wages, with no Florida credit because Florida has no income tax. Employers in those states must withhold accordingly.
Do reciprocity agreements help?
Some neighboring states agree that employees pay tax only to their resident state; the employer withholds for that state after the employee files an exemption form. Reciprocity covers wage income only and does not exist in many pairings.
What should a Florida employer do when hiring out of state?
Register for withholding and unemployment in the employee's state, set up workers' compensation there, review whether the employee's presence creates income tax and sales tax filing obligations, and add the state to the payroll system before the first paycheck. A professional employer organization can carry the registrations for a fee, which is often the simplest route for one or two employees in a state.
What are the common mistakes?
Withholding Florida-style (nothing) for an employee in a tax state; treating a remote employee as a contractor to avoid registration; missing state new-hire reporting; and discovering nexus years later when a state sends a questionnaire.
Frequently asked questions
What if the employee splits time between two states?
Withhold for each state based on days worked there, with the employee's records; unemployment goes to one state under the localization rules.
Does a remote employee abroad change this?
Yes — foreign payroll, social security totalization, and permanent establishment rules apply instead of state rules.
Can I just withhold for the employer's state?
Only where the employee works there or a convenience rule applies; otherwise the employee's state's tax is due and the employer is liable for it.
Does hiring a contractor in another state create the same issues?
Fewer, but a contractor performing services in a state can still create nexus for the business.
Official sources
The IRS explains: “The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax.” — Internal Revenue Service, Publication 15 (2026), (Circular E), Employer’s Tax Guide, https://www.irs.gov/publications/p15
The Department of Labor explains: “The objective of "localization of work" provisions in state unemployment insurance laws is to cover under one state law all of the service performed by an individual for one employer, wherever it is performed.” — U.S. Department of Labor, Unemployment Insurance Program Letter No. 20-04: Attachment I (Localization of Work Provisions), https://www.dol.gov/sites/dolgov/files/ETA/advisories/UIPL/2004/UIPL20-04_AttachI.html
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our payroll team registers the employer in each state before the first out-of-state paycheck. See pricing or book a free fit call.
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