Tax Implications of Hiring Remote Workers in Different States

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

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

Hiring a remote employee in another state triggers multiple state tax obligations for the employer. Most states require employers to withhold state income tax in the state where the employee physically works (the employee’s home state, if they work from home). The employer must also register with that state’s unemployment agency and pay State Unemployment Tax (SUI/SUTA). In some states, having a remote employee creates “nexus” for the business, requiring the employer to file corporate income tax returns and potentially collect sales tax in that state. A few states (notably New York, Connecticut, Delaware, Nebraska, and Pennsylvania) apply a “convenience of the employer” rule, which taxes remote workers based on the employer’s location rather than the employee’s, potentially causing double taxation that may or may not be offset by credits.

✓Key takeaway

Employer obligations when hiring a remote worker in another state:

Obligation	Details
Register as foreign entity	File foreign qualification with the state (Secretary of State)
State income tax withholding	Withhold employee’s state income tax based on their work state
SUI/SUTA registration	Register with the employee’s state unemployment agency
Workers’ compensation	Obtain coverage in the employee’s state (or ensure existing policy covers that state)
State entity/corporate return	May be required to file if nexus is established
Local tax withholding	Some localities (NYC, Philadelphia, many Ohio cities) have their own income taxes

Convenience of the employer rule (applies in limited states):

State	Rule
New York	Remote workers who occasionally work in NY (employer’s state) may be taxed by NY on all income unless work from home is a “necessity” of the employer
Connecticut	Applies the convenience rule for CT-based employers
Delaware	Applies the convenience rule
Nebraska	Applies the convenience rule
Pennsylvania	Some local jurisdictions apply a convenience-like rule
Most other states	Tax based on where work is performed (employee’s home state)

States with no income tax (simplest for remote workers):

State	Income Tax	Impact
Florida	None	No state withholding needed
Texas	None	No state withholding needed
Nevada	None	No state withholding needed
Washington	None (but has payroll expense tax in some cities)	No state withholding, but check local
Wyoming	None	No state withholding needed
South Dakota	None	No state withholding needed
Tennessee	None (no wage income tax)	No state withholding needed
New Hampshire	None (no wage income tax)	No state withholding needed
Alaska	None	No state withholding needed

Reciprocal agreements (reduce double withholding): Some neighboring states have agreements where residents working across state lines are only taxed by their home state:

Example Pairs	Effect
Virginia and DC, Maryland	Only home state withholds
New Jersey and Pennsylvania	Only home state withholds
Illinois and Iowa, Kentucky, Michigan, Wisconsin	Only home state withholds
Indiana and Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin	Only home state withholds

What do employers do for remote out-of-state?

Hypothetical example

Round numbers. A Florida-based S-Corp (no state income tax) hires a remote software developer in California.

New obligations created:

Obligation	Florida (employer HQ)	California (employee location)
State income tax withholding	N/A (no state tax)	Must withhold CA income tax (up to 13.3%)
SUI/SUTA	FL SUTA (2.7% new employer rate on first $7,000)	CA SUTA/SDI/ETT on employee’s wages
Workers’ comp	FL coverage	May need CA endorsement or separate policy
State entity return	No income tax return	May need to file CA Form 100S (S-Corp) if nexus
Sales tax nexus	FL sales tax (if applicable)	CA sales tax nexus if selling tangible goods
Foreign qualification	N/A	Register with CA Secretary of State ($800 min franchise tax)

Cost analysis of hiring in California vs. Florida:

Item	FL Employee	CA Employee
Salary	$120,000	$120,000
State withholding (employer burden)	$0	Approximately $0 (employee’s obligation, but employer must withhold and remit)
CA franchise tax (minimum)	$0	$800/year
CA payroll taxes (SDI, ETT)	$0	Approximately $1,500/year
Workers’ comp (CA rates higher)	$500/year	$800/year
CA foreign qualification fee	$0	$25 (one-time)
Payroll service (multi-state setup)	$0 additional	$50-$100/month additional
Annual additional cost	$0	~$3,400

The convenience-of-employer problem (New York example): A New York-based employer hires a remote developer in New Jersey. New York applies the convenience rule.

Item	What NY Says	What NJ Says
Who taxes the income	NY taxes all income (employer is in NY)	NJ taxes all income (employee works in NJ)
Credit available?	NY gives no credit for NJ tax	NJ gives credit for NY tax paid
Net result	Employee may be taxed by BOTH states, with NJ providing a partial credit

If the employee earns $120,000:

Tax	Amount
NY state tax (convenience rule)	~$7,200
NJ state tax	~$4,800
NJ credit for NY tax paid	($4,800)
Net state tax	~$7,200

The employee effectively pays NY tax rates even though they live and work in NJ. The employer is not directly harmed, but the employee’s effective tax rate is higher, which can affect compensation negotiations.

Exception to the convenience rule: If the employer can demonstrate that the employee works remotely out of necessity (the employer has no NY office space for the employee, or the job requires the employee to be in NJ), the convenience rule does not apply. But “employee preference” is not necessity.

Practical steps for the Florida employer hiring in California:

Step	Action	Timeline
1	Register as foreign entity with CA Secretary of State	Before first payroll
2	Register with CA Employment Development Department (EDD) for state withholding and SUI	Before first payroll
3	Obtain CA workers’ compensation coverage	Before employee starts
4	Set up payroll to withhold CA state income tax, SDI, and ETT	Before first payroll
5	File CA Form 100S (S-Corp) annually if nexus established	March 15 annually
6	Pay $800 CA minimum franchise tax	Annually

The PEO/EOR alternative: For businesses hiring in 1-2 remote states, direct registration and compliance is manageable. For businesses hiring across many states, a Professional Employer Organization (PEO) or Employer of Record (EOR) handles all state registrations, withholding, and compliance for a fee (typically $500-$1,500/employee/month).

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

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Cite this page

Yarik Yarosh, CPA. "Tax Implications of Hiring Remote Workers in Different States." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-tax-implications-remote-workers-different-state

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