Tax Implications of Remote Workers in Multiple States

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Hiring a remote worker in another state is a tax event. The moment a person performs services for your business from a state where you have no presence, you may create nexus (a taxable connection) in that state. Nexus can trigger state income tax filing obligations, payroll withholding requirements, sales tax collection duties, and state unemployment insurance registration. A single remote employee can add $1,000-$5,000/year in compliance costs (state tax return preparation, payroll registration, additional tax).

✓Key takeaway

What one remote worker in a new state triggers:

1. State income tax withholding:

You must register as an employer in the employee’s state
Withhold state income tax from their paycheck at that state’s rates
File quarterly and annual withholding returns with that state
Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming (hiring in these states avoids this obligation)

2. State income tax for the business:

An employee creates nexus for the employer’s income tax in most states
If your business has nexus: you must file a state income tax return (or franchise tax return) in that state
The state taxes a portion of your business income (apportioned based on sales, payroll, and/or property in that state)
For an S-Corp: this may require a composite return or the employee-state’s portion of K-1 income to be reported

3. State unemployment insurance (SUI):

Register with the employee’s state for unemployment insurance
Pay SUI taxes (rates vary: 1-6% of the first $7,000-$50,000 of wages, depending on the state)
File quarterly SUI returns

4. Sales tax nexus:

An employee in a state can create physical nexus for sales tax purposes (Texas and Ohio, for example, list employees as a trigger)
If you sell taxable goods or services into that state: you must collect and remit sales tax
Whether an employee who has nothing to do with sales counts depends on each state’s rule

5. Workers’ compensation:

Workers’ comp coverage must comply with the employee’s state rules
Some states require a separate policy or an endorsement on your existing policy
Rates vary significantly by state

6. Local taxes:

Some cities and counties have their own income tax, payroll tax, or business tax
New York City, Philadelphia, San Francisco, and others have local taxes triggered by employees working there
These local obligations are often missed in multi-state planning

Cost estimate per additional state:

State income tax return preparation: $500-$1,500/year
Payroll registration and withholding: $200-$500/year
SUI registration and payments: $200-$2,000/year
Compliance software or service: $100-$300/year
Total: $1,000-$4,300/year per additional state

How does multi-state employment affect a small business?

Hypothetical example

Round numbers. An S-Corp based in Florida (no state income tax) with $500,000 in net income. The owner (sole shareholder) lives in Florida. The S-Corp hires two remote employees: one in California and one in New York.

Before remote hires (Florida only):

State income tax: $0 (Florida has no income tax)
State filings: Florida annual report only ($138.75)
Payroll: Florida SUI only

After remote hires:

California employee ($80,000 salary):

California employer registration: required
CA income tax withholding: deducted from employee’s paycheck
CA SUI: approximately $434/year (employer cost)
CA Employment Training Tax: $7/year
CA SDI: paid by employee
CA S-Corp franchise tax: $800/year minimum
CA S-Corp income tax: 1.5% of net income apportioned to California
- Apportionment (single sales factor for most businesses): if 10% of sales are to California customers, approximately $500,000 x 10% x 1.5% = $750
- If sales are not California-sourced: the payroll factor alone may still apportion some income
CA tax return preparation: approximately $1,000/year
Annual California compliance cost: $2,991+

New York employee ($90,000 salary):

NY employer registration: required
NY income tax withholding: deducted from employee’s paycheck
NY SUI: approximately $600/year
NY S-Corp filing fee: based on NY receipts (minimum $25, up to $4,500)
NY income tax: corporate franchise tax with business income base
NY Metropolitan Commuter Transportation Mobility Tax (if NYC area): 0.34% of payroll
NY tax return preparation: approximately $1,200/year
Annual New York compliance cost: $2,825+

Total new compliance cost: approximately $5,816/year

This is a fixed cost regardless of how much value the remote employees generate. For small businesses, the compliance cost per employee is disproportionately high compared to large companies that spread the cost across hundreds of employees.

Strategies to minimize multi-state exposure:

Hire contractors instead of employees in states where you don’t want nexus. Contractors don’t create payroll nexus (but be careful about worker classification under that state’s laws).
Hire in no-income-tax states (Florida, Texas, Nevada, Wyoming, etc.) to avoid state income tax obligations entirely.
Use a PEO (Professional Employer Organization) to co-employ workers. The PEO handles payroll registration, withholding, and SUI in every state. Cost: $100-$200/employee/month, but it eliminates the administrative burden.
Evaluate whether the employee justifies the state’s cost. If hiring in California adds $3,000/year in compliance costs, that’s the equivalent of a $3,000 raise you didn’t plan for. Factor it into the total cost of the hire.

Illustrative numbers only, not a real client and not advice for your facts.

How do I determine where I owe state income tax?

You owe state income tax in every state where your business has nexus, which can arise from physical presence (an office, employee, or warehouse), economic activity above the state’s threshold, or performing services in the state. Most states use an apportionment formula to divide your total business income among the states where you operate. The majority of states now use single-factor apportionment based on sales (revenue sourced to each state), though some still weight payroll and property. Each state has its own rules, rates, and filing requirements, and some states do not have an income tax at all.

What is the difference between nexus, apportionment, and allocation?

Nexus is the threshold question: does the state have the right to tax your business at all? Once nexus exists, apportionment is the formula that divides your operating income among the states where you do business, typically based on where your customers are located. Allocation is different: it assigns specific non-operating income items (gain on the sale of real property, for example) entirely to one state rather than spreading them. Most ongoing business income is apportioned, while one-time gains are allocated. Understanding the distinction matters because allocated income can create a large, unexpected tax bill in a single state.

Related guides:

Can a remote hire in another state change your sales tax?

It can, and the hire is only part of it. Physical presence is judged state by state, and each state also has its own sales threshold. California’s is more than $500,000 of tangible goods delivered there in the preceding or current calendar year. New York’s is more than $500,000 and more than 100 sales of goods over the prior four sales tax quarters.

Whether an employee who never sells creates nexus depends on how the state words its rule. Texas, for example, lists an employee or representative in Texas to sell, deliver or take orders, while Ohio’s statute presumes nexus when a seller regularly uses employees in the state, a presumption the seller can rebut.

None of this settles income tax nexus, which is its own test. P.L. 86-272 only helps sellers of tangible goods with state net income tax, and it never applies to sales tax.

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Cite this page

Yarik Yarosh, CPA. "Tax Implications of Remote Workers in Multiple States." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-remote-workers-multi-state-tax

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.