Let’s be honest—the way we work has fundamentally changed. The office is now a kitchen table, a coffee shop, or maybe a sunroom. For employees, that’s often a dream. For businesses managing payroll and taxes? Well, it can feel more like a logistical nightmare.
Gone are the simple days of “one office, one state tax return.” Now, with a team scattered across the map, a single employee can create a tax obligation—a “nexus”—in a state you’ve never even visited. Navigating this new landscape is tricky, but absolutely crucial. Here’s a practical guide to getting it right.
The Core Challenge: It’s All About Nexus
First things first: you need to understand nexus. It’s a legal term for a sufficient physical or economic connection to a state that requires you to follow its tax rules. Traditionally, nexus meant having an office, a warehouse, or salespeople on the ground.
But with remote work, the rules have… blurred. Dramatically. An employee working from their home in Colorado can create income tax withholding obligations for your company in Colorado. That same employee might also create a corporate income tax filing requirement for your business there. It’s a domino effect from a single decision to let someone work from anywhere.
Two Types of Nexus You Can’t Ignore
This gets a bit into the weeds, but stick with me. There are two main types of nexus to track:
- Payroll Tax Nexus: This is triggered when you have an employee physically working in a state. It obligates you to withhold that state’s (and often locality’s) income taxes, and pay state unemployment insurance (SUTA).
- Income Tax Nexus: This determines whether your company owes corporate income or franchise tax to a state. A remote employee can create this, but the thresholds vary wildly. Some states have a “bright-line” rule (e.g., $500,000 in sales or 100 transactions), while others use a murkier “economic presence” test.
And here’s the kicker—these rules are not uniform. What flies in Texas might sink you in California. You know?
The Hybrid Work Tax Tangle
Hybrid setups add another layer of complexity. Think about an employee who lives in New Jersey but commutes to your New York office three days a week. You’re likely dealing with the dreaded “convenience of the employer” rule.
States like New York, Delaware, and Nebraska have this rule. Essentially, if an employee is working remotely for their own convenience (not because the company requires it), their wages may still be sourced to the office location. So, you’d withhold New York taxes, even on days they work from home in New Jersey. This can lead to double taxation for the employee, requiring them to file credits in both states. It’s a major pain point and a frequent source of disputes.
Local Taxes: The Plot Thickens
Just when you think you’ve got a handle on state rules, local taxes swoop in. Over a dozen states have cities or counties that levy their own income taxes. Philadelphia, Detroit, and many cities in Ohio and Kentucky are prime examples.
If you have an employee in, say, Columbus, Ohio, you need to withhold the correct city tax. Get the withholding wrong, and your employee faces a surprise bill at tax time—and you face penalties and interest. It’s a surefire way to damage morale and trust.
Practical Steps to Regain Control
Okay, enough with the problems. What can you actually do? Here’s a game plan.
1. Audit Your Employee Footprint
Start with a simple list. Where does every single employee actually perform their work? Don’t guess. Survey them. You might be shocked to find someone who moved six months ago and never told HR.
2. Understand Each State’s Thresholds
For each state on your list, research. What creates payroll nexus? What creates income tax nexus? The Multistate Tax Commission website is a good starting point, but honestly, this is where many companies bring in a specialist. The cost of a consultant is often less than the cost of one audit.
3. Implement a Clear Remote Work Policy
This is non-negotiable. Your policy should outline where employees are permitted to work. It might state that employees can work from any approved state, or it might restrict work to states where the company is already set up to handle taxes. This prevents that “I’m working from my vacation rental in Hawaii for a month” surprise.
4. Leverage Technology & Partners
Modern payroll software can help, but it’s only as good as the data you feed it. Consider using a professional employer organization (PEO) or an employer of record (EOR) if you’re dipping a toe into new states. They handle the registration and compliance for you—for a fee, sure, but it’s often worth the peace of mind.
A Quick Glance at Key Considerations
| Scenario | Primary Tax Concern | Action Step |
| Employee moves to a new state permanently. | Payroll & Income Tax Nexus in new state. | Register with state tax agencies; update withholding immediately. |
| Hybrid employee in a “convenience rule” state. | Potential double state taxation for employee. | Consult a tax pro; consider formal telecommuting agreements. |
| Employee works temporarily from a different state. | Nexus may be created depending on duration (often 30+ days). | Track “mobile” employees closely; have a clear temporary work policy. |
| Business has remote workers in multiple cities. | Local city or county income tax withholding. | Ensure your payroll system is configured for local taxes in each jurisdiction. |
Looking Ahead: A Patchwork Future
The truth is, tax law is struggling to catch up to how we work now. We’re stuck in a patchwork of conflicting rules that create administrative burdens for companies and unfair tax bills for employees. Some states are working on reciprocity agreements or simplifying rules, but progress is slow.
In the meantime, the best defense is a proactive offense. Map your workforce. Understand the triggers. And build policies that are both flexible for your team and compliant with a dizzying array of local rules. It’s not about building walls to keep people from working where they want—it’s about building the infrastructure to support them, wherever they are. Because that flexibility, managed wisely, is now one of your most powerful assets.
