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

How remote workers create state nexus:

1. 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

2. 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.

3. 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).

4. 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.

5. 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