State Tax Nexus for Remote Businesses: When Remote Workers Create Filing Obligations
Remote work has made state tax nexus one of the fastest-growing compliance issues for small businesses. Before 2020, most small businesses operated in one state and filed one state return. Now, a single remote employee in another state can trigger income tax nexus, payroll withholding obligations, sales tax registration, and even workers’ comp requirements in that state. The rules vary by state, and the thresholds are often lower than business owners expect.
How remote workers create state nexus:
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Physical presence nexus. An employee working from their home in State B creates physical presence for the employer in State B. Even one employee for one day can trigger nexus in some states (though many have de minimis thresholds). The employer may be required to:
- File a state income tax return in State B (reporting income apportioned to that state)
- Register for payroll withholding in State B
- Withhold State B income tax from the employee’s wages
- Pay unemployment tax in State B
- Carry workers’ comp coverage in State B
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Economic nexus (for income tax). Some states apply economic nexus for income tax, meaning that even without physical presence, sufficient revenue from customers in that state can create a filing obligation. Thresholds vary: $500,000 in revenue, or $50,000 in property/payroll, depending on the state.
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Sales tax nexus. If the business sells taxable products or services, a remote employee in a state may trigger sales tax nexus in addition to income tax nexus. Most states have economic nexus thresholds for sales tax ($100,000 in sales or 200 transactions).
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Convenience of the employer rule. A few states (notably New York, Connecticut, Delaware, Nebraska, and Pennsylvania) tax nonresidents who work remotely for an employer in that state unless the remote work is for the employer’s necessity, not the employee’s convenience. This can result in double taxation unless the employee’s home state provides a credit.
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Reciprocity agreements. Some neighboring states have reciprocity agreements where employees only owe income tax to their state of residence, not their state of employment. This simplifies withholding but does not eliminate the employer’s nexus for income tax filing.
States with no income tax (no nexus concern for income tax, but still payroll/other): Alaska, Florida, Nevada, New Hampshire (no earned income tax), South Dakota, Tennessee (no earned income tax), Texas, Washington, Wyoming
What does multi-state compliance cost a small business?
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 (typically $100,000 in sales or 200 transactions in a year). 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:
How do you handle state tax obligations when your business operates in multiple states?
Multi-state businesses must determine their filing obligations in each state based on nexus (physical presence, economic thresholds, or factor-based), then apportion income using each state’s apportionment formula. Most states use a single-factor sales apportionment formula that assigns income based on where your sales are delivered, though some states still use a three-factor formula weighting sales, payroll, and property. Throwback and throwout rules in some states can increase your tax liability by reassigning sales revenue from states where you aren’t taxable back to your home state. The pass-through entity tax election available in most states allows S corps and partnerships to pay state income tax at the entity level and claim a federal deduction, effectively bypassing the $10,000 SALT deduction cap for owners.
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Yarik Yarosh, CPA. "State Tax Nexus for Remote Businesses: When Remote Workers Create Filing Obligations." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-state-nexus-remote-workers
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.