Are you hiring a remote employee in another state?
Have you thought about what that means for your business’s tax obligations?
Most business owners don’t realize that one out-of-state hire can trigger income tax, payroll filings, sales tax, and legal registration requirements… even if you’ve never done business in that state.
Beyond that, every state has different rules, different thresholds, and different penalties for getting it wrong.
At Patrick Accounting, we’ve helped dozens of businesses avoid costly surprises by understanding state-specific tax risks before hiring remote workers.
In this article, you’ll learn exactly what tax problems remote employees create, when they’re triggered, and the step-by-step actions you can take to stay compliant.
What Is Nexus and How It Creates State Tax Obligations
Let's start with the technical term that causes all these headaches: nexus.
Nexus simply means you have enough connection to a state that the state now believes you owe them taxes. Think of it like a tripwire. The moment you cross that line, dominoes start falling from a compliance standpoint.
Many business owners mistakenly believe that if their company is based in Tennessee, they only owe taxes in Tennessee, but that’s no longer true.
With the explosion of remote work, e-commerce, and businesses operating across state lines, where your employees live and work matters just as much as where your business is located.
Nexus rules aren't federal. Every single state gets to make up its own rules about what triggers tax obligations. Mississippi's rules are different from Arkansas's rules. California's rules are different from everyone's rules.
This is why multi-state tax issues have become such a minefield for small business owners.
3 Ways Remote Employees Can Trigger State Tax Obligations
So, what actually triggers nexus? While every state is a little different, nexus is always based on one of three factors:
Trigger #1: Hiring Remote Employees in Another State
This is the big one that catches most business owners off guard.
Even one employee working in another state can create nexus. It doesn't matter if they're full-time, part-time, or only there temporarily. If you have payroll expense in that state, you've likely triggered nexus.
For example, let’s say you're a Tennessee-based business. You hire someone who lives in Mississippi but works remotely for you. Hiring that Mississippi-based employee effectively opened a branch office in that state in the eyes of the tax authorities.
You now have potential obligations for:
- Mississippi income tax (on the portion of profits allocated to that state
- Mississippi unemployment insurance
- Mississippi payroll withholding
- Potentially Mississippi sales tax (depending on your business)
- Business registration in Mississippi as a foreign entity
All from one hire.
Trigger #2: Storing Physical Business Property Across State Lines
The second trigger is having physical property stored, rented, or owned in another state.
This includes:
- Warehouse space where you store inventory
- Equipment or vehicles registered in that state
- Office space (even a small storage unit)
- Even just a storage building where you keep old computers
If you decided to store some inventory in a warehouse that just happens to be across state lines, congratulations, you probably have nexus in that state now.
Trigger #3: Doing Business or Making Sales in Another State
This one gets complicated because sales by themselves don't always trigger nexus, but they definitely can.
For service providers who aren't sending employees or storing property in another state, you may or may not have nexus depending on:
- What type of service you're providing
- Whether that service is taxable in that state
- How many days you physically worked there
- The total dollar amount of sales
And this can get tricky. Some states are more aggressive than others. Michigan? You're probably going to trigger nexus if you do any significant work there. Kansas? Maybe, maybe not.
The point is: You can't assume. You have to check.
What Happens When Nexus Triggers State Tax Obligations
Once you've triggered nexus in another state, multiple compliance requirements kick in simultaneously. Here’s what actually happens:
Income Tax Obligations Caused by Nexus
When you have nexus, some portion of your business profits will need to be allocated or apportioned to that state.
Let's say your business made $100,000 in profit this year. After running through the allocation formulas (which vary by state), you determine that 5% of your profits are attributable to activities in the other state.
That means $5,000 of your profit is now taxable in that state. You'll owe income tax on that $5,000 at whatever that state's tax rate is.
Sales Tax Requirements With Nexus
Depending on what your business does, you may need to collect and remit sales tax in that state.
For example, in Mississippi, most electrical and construction contractor services are taxable. In Tennessee, those same services are NOT taxable.
So, if you're a Tennessee-based electrical contractor and you do a job in Mississippi, you need to collect Mississippi sales tax from your customer and remit it to the state. Miss this, and you're on the hook for the tax out of your own pocket, plus penalties.
Payroll Tax Complexity to Consider With Nexus
Payroll tax is where things can get really messy. You’re looking at:
- Unemployment insurance: You must file unemployment insurance taxes in the state where the remote employee resides, even if your business is based elsewhere.
- Payroll withholding: You'll need to withhold state income tax for most states (though some states don't have income tax).
- Workers' compensation: Requirements vary dramatically by state and industry.
Each of these creates ongoing compliance obligations, quarterly or annual filings, and penalties if you miss deadlines.
Business Registration Requirements
Once nexus is triggered, most states require your business to register as a foreign entity, even if you’ve never physically operated there. This means:
- Initial registration fees
- Annual report filings
- Maintaining a registered agent in that state
- Keeping your registration current
And it's not just a one-time thing. It's an ongoing obligation for as long as you have nexus there.
Here’s what this looks like in real life:
We had a Tennessee-based electrical contractor client who took on a short project in Olive Branch, Mississippi. That’s just 30 minutes from Memphis, and the job lasted only three weeks. But because they had boots on the ground in Mississippi, they triggered nexus. That meant registering as a foreign business, adjusting payroll filings, evaluating workers’ comp, and handling state sales tax. And that was all from one three-week job across state lines.
What It Costs When You Get This Wrong
What you don’t know about state tax compliance can cost you thousands, and it’s rarely a quick fix.
Even if you don’t know you’ve triggered nexus, the tax authorities will. They have the tools to prove it.
States share information. When you file your federal tax return, your state tax return, your payroll reports, and your sales tax filings, you're creating a paper trail. States can see when you have employees in their jurisdiction, when you're making sales there, and when you have property there.
It's not a matter of if they'll find out. It's when.
When they do discover non-compliance, here's what you're facing:
- Back taxes for all the periods you should have been filing
- Interest on those unpaid taxes (compounding)
- Penalties for late filing and late payment
- Additional penalties for failing to register when required
We’ve worked with business owners who thought they were avoiding hassle by “waiting to see if anyone noticed.” What they got instead were years of unpaid taxes, thousands in interest, and penalties that could have been prevented with one early conversation.
Which States Are Most Difficult for Hiring Remote Employees?
Not all states are created equal when it comes to compliance complexity.
Some states create significantly more headaches than others. At Patrick Accounting, there are certain states we generally avoid hiring remote employees from, simply because the compliance burden isn't worth it for most small businesses.
California and New York top that list.
Both states have:
- Extremely complex tax codes
- Aggressive enforcement
- High tax rates
- Strict employment laws that go beyond just taxes
- Expensive compliance requirements
You don’t have to avoid these states, but you absolutely must understand the tax and legal burdens before hiring there.
Want a deeper dive into which states are the most challenging?
Check out our sister site, Whirks, where we break down the 5 worst states for remote hiring compliance and explain exactly why they’re so complex: Remote Hiring: 5 Worst States for Compliance
What to Do Before Hiring Remote Employees
The moment you start thinking about hiring a remote employee, you need to have conversations with your trusted advisors.
Don’t wait until you’ve posted the job or extended an offer. Multi-state compliance starts before the hire, not after the notice.
Step 1: Talk to Your Accountant Before You Post the Job
If you do nothing else, start with this conversation. You need to discuss:
- Which states you're considering
- What compliance obligations will be triggered
- Estimated costs for ongoing compliance
- Whether certain states should be avoided
- Timeline for getting everything set up
Your accountant needs to know:
- Where the employee will live and work
- What type of work they'll be doing
- Whether they'll ever travel to other states for work
- Your current business structure and existing state registrations
Step 2: Consult Your Attorney on Employment Law Differences
Beyond taxes, there are legal considerations:
- Employment law differences between states
- Required benefits and leave policies
- Termination rules and unemployment claims
- Liability and workers' compensation issues
Step 3: Plan for Compliance Setup and Cost
Once you’ve spoken with your accountant and attorney, work with them to create a plan that includes both the specific actions you’ll need to take and the true cost of staying compliant in each state.
Start by building a checklist of the compliance items required in the state where your remote employee will work. This may include:
- Registering as a foreign entity
- Setting up sales tax collection (if applicable)
- Updating your payroll system for state withholding
- Unemployment insurance and workers’ comp coverage
- Annual state reports and filing obligations
Once that checklist is in place, evaluate the ongoing costs tied to those obligations. These may include:
- Additional accounting or payroll processing fees
- Annual registration and state report costs
- Time spent managing multi-state compliance
- Potential legal or HR consulting expenses
In some cases, these costs may impact your decision to hire in that state. What looks like a great candidate on paper may come with significant overhead you didn’t anticipate.
Step 4: Evaluate Employee vs. Contractor Classification Carefully
We often get asked, "What if I hire them as an independent contractor instead of an employee?"
This can sometimes reduce nexus issues, but you can't just call someone a contractor to avoid taxes. The IRS and states have strict rules about who qualifies as a contractor versus an employee.
Misclassifying an employee as a contractor creates even bigger problems than nexus issues. This is definitely a conversation to have with both your accountant and attorney.
Not sure which classification fits?
Our team at Whirks has put together a simple, interactive tool to help you understand the difference.
Questions to Ask Your Accountant
Here are the exact questions we recommend every client ask their accountant before hiring out-of-state:
- Does hiring someone in [state] create nexus for our business?
- What specific tax filings will we need to handle?
- What are the estimated costs for ongoing compliance?
- Are there states we should avoid due to complexity?
- What's the timeline for getting everything set up properly?
- What happens if we've already hired someone without setting this up?
Don't be afraid to ask questions. You’re not expected to know this stuff, and your accountant would much rather help you get ahead of compliance than clean up a costly mistake later.
You Can Hire Remote Employees Successfully If You Plan for Taxes First
Hiring remote employees can absolutely help your business grow, but only when you understand the state tax obligations that come with it.
If you’ve read this far, you’re likely trying to avoid surprise tax bills, compliance issues, and frustrating notices from states you didn’t know you were connected to. Luckily, all of this is preventable when you plan ahead.
Talk with your accountant and legal team before you make a remote hire. And if you’re unsure what that conversation should look like, we’re here to help.
At Patrick Accounting, we help business owners confidently hire remote employees without getting buried in state-specific tax rules or costly mistakes. We’ve helped clients across multiple states stay compliant, and we can help you, too.
Ready to discuss your multi-state situation? Schedule a consultation with our team. We'll help you understand your obligations, set up the right systems, and hire with confidence, no matter where your employees live.
