Tax Implications of Remote Employees for Small Businesses
Hiring a remote employee in another state is not as simple as adding them to payroll. Each state where an employee works requires the employer to register for state income tax withholding, state unemployment insurance, and potentially other taxes (local income tax, disability insurance, paid family leave). The employer must also withhold the correct state income tax based on where the employee works, not where the company is located. For small businesses accustomed to operating in a single state, the first remote hire in a new state can trigger a cascade of compliance obligations.
Obligations when hiring a remote employee in another state:
1. State income tax withholding.
- The employer must withhold income tax for the state where the employee works (their home state, if they work from home)
- If the employee travels to the employer’s state for meetings, some states require withholding for each day worked in that state (the “convenience of the employer” rule in states like New York, Connecticut, and others)
- The employer must register with the state’s department of revenue/taxation
2. State unemployment insurance (SUI).
- The employer must register with the state’s unemployment insurance program
- SUI rates vary by state (0.5%-7%+) and by the employer’s experience rating
- New employers typically pay the state’s “new employer rate” (usually 2-3%)
- Taxable wage base varies: $7,000 (federal FUTA) to $62,500+ (some states)
3. Workers’ compensation.
- Most states require workers’ comp coverage for all employees, including remote employees
- The employer’s policy must cover the state where the employee works
- Some insurers charge higher premiums for out-of-state coverage
4. State and local payroll taxes.
- Some states have additional payroll taxes: transit taxes (Oregon), disability insurance (California, New York, New Jersey, Hawaii, Rhode Island, Puerto Rico), paid family leave (California, New York, Washington, others)
- Local income taxes: employees in cities like New York City, Philadelphia, St. Louis, and others owe local income tax that the employer must withhold
5. Corporate income tax nexus.
- Having an employee in a state can create corporate income tax nexus (the state can tax a portion of the business’s income)
- This applies to C-Corps and S-Corps (though S-Corp income passes through to the owner’s personal return)
- The income apportionment is typically based on the percentage of sales, payroll, and property in that state
6. Sales tax nexus.
- An employee working in a state can create physical nexus for sales tax purposes (Texas and Ohio, for example, list employees as a trigger)
- If the business sells taxable goods or services to customers in that state, it must collect and remit sales tax
- Whether an employee who isn’t involved in sales counts depends on each state’s rule
7. Business registration.
- Many states require the employer to register as a “foreign” entity (a business formed in another state) before conducting business (including employing someone) in the state
- This typically involves filing a certificate of authority and paying a registration fee
What’s the compliance burden for a 5-person remote team?
What payroll tax obligations does an employer have?
Employers must withhold federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from employee wages, then match the Social Security and Medicare portions from their own funds. The employer’s total payroll tax cost is at least 7.65% of wages on top of what the employee pays. Federal unemployment tax (FUTA) adds 6% on the first $7,000 of each employee’s wages, reduced to 0.6% in states with approved unemployment programs (most states). Payroll taxes must be deposited on a semi-weekly or monthly schedule depending on your total tax liability, and late deposits trigger escalating penalties (2% to 15%). Officers and other “responsible persons” who willfully fail to collect and remit payroll taxes face the trust fund recovery penalty (IRC 6672), which is 100% of the unpaid trust fund taxes and is assessed personally.
What is a sales tax exemption certificate and when do I need one?
A resale certificate (or exemption certificate) allows you to purchase inventory or goods for resale without paying sales tax to the vendor. You collect sales tax from the end customer instead. The certificate must be kept on file by the seller as proof that tax was not required on the transaction. You are liable for the tax if you use a resale certificate to purchase items for personal use or for business use (not resale). Each state has its own certificate form, though many accept the Multistate Tax Commission’s Uniform Sales & Use Tax Certificate. Exemption certificates for other purposes (nonprofit, government, manufacturing) have additional requirements and are audited closely.
Related guides:
Can a non-sales remote employee create sales tax nexus?
It depends on how the state words its rule. Texas says you’re engaged in business there if you have an employee or representative in Texas to sell, deliver or take orders for taxable items, or if you own or use tangible personal property in Texas. Ohio’s statute presumes nexus when a seller regularly uses employees, agents or representatives in Ohio.
So for the Florida S-Corp in the example, the Texas hire needs a closer look if that person sells or takes orders, and Texas’s property rule can reach equipment you send them. Ohio’s presumption can be rebutted. For California, New York and Georgia, read each state’s own rule before assuming either way.
The income tax side runs separately. P.L. 86-272 only limits state net income tax for sellers of tangible goods, and it never reaches sales tax.
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Yarik Yarosh, CPA. "Tax Implications of Remote Employees for Small Businesses." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-tax-implications-remote-employees
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.