Tax Implications of Remote Workers in Multiple States: Nexus, Withholding, and Convenience-of-the-Employer Rules

The shift to remote work has turned what was once a problem for only the largest employers into a compliance issue for businesses of every size. Before remote work became widespread, most employees worked in one state, and the employer’s withholding obligation was straightforward. Now, a 10-person company might have employees in 8 different states, each with its own income tax withholding rules, unemployment insurance requirements, and registration obligations. The baseline rule is simple: if an employee works in a state, the employer must withhold that state’s income tax from the employee’s wages and remit it to the state. But the details vary enormously. Some states have reciprocal agreements that override this rule for border communities. Several states apply the “convenience of the employer” doctrine, which taxes income in the employer’s state even when the employee works elsewhere. And the question of whether a remote employee creates corporate income tax nexus for the business (requiring the business itself to file a return and pay income tax in the employee’s state) adds another layer of complexity.

How do multi-state remote workers affect business taxes?

How do I know if I need to collect sales tax?

Sales tax obligations depend on nexus, a connection between your business and a state that triggers a collection requirement. Physical nexus comes from having a location, employee, or inventory in a state. Economic nexus, established after the 2018 Supreme Court decision in South Dakota v. Wayfair, triggers when you exceed a state’s revenue or transaction threshold (each state sets its own figure and period; Florida and Pennsylvania use $100,000 of sales, for example, while California and Texas use $500,000). Each state sets its own rules, rates, and exemptions. If you sell online and ship to multiple states, you likely have economic nexus in several states and must register, collect, and remit sales tax in each.

What is the difference between sales tax and use tax?

Sales tax is collected by the seller at the point of sale and remitted to the state. Use tax is owed by the buyer when sales tax was not collected, typically on out-of-state purchases or items withdrawn from inventory for personal use. As a business, you owe use tax on equipment, supplies, or inventory purchased from vendors who did not charge sales tax. Many states combine sales and use tax on a single return. Failing to self-assess use tax can result in back-tax assessments for the full statute of limitations period, typically three to four years, plus interest and penalties.

Related guides:

• State Tax Nexus for Remote Businesses: When Remote Workers Create Filing Obligations

Can remote staff create sales tax nexus despite P.L. 86-272?

No. P.L. 86-272 only limits state net income tax, and only when your in-state activity is soliciting orders for tangible goods that are approved and shipped from outside the state. It says nothing about sales tax, so a remote employee can still create a sales tax collection duty where they work.

How much a remote employee counts depends on the state. Texas treats a business as engaged in business there if it has an employee or representative in Texas to sell, deliver or take orders for taxable items. Ohio’s statute presumes nexus when a seller regularly uses employees, agents or representatives in Ohio, though that presumption can be rebutted.

For the New York company in the example, each remote hire’s state needs its own sales tax check, apart from the withholding and convenience-rule questions above.

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