Compliance tips for employers with remote work nexus issues
Remote work is no longer a temporary solution, as was originally thought during the Covid-19 pandemic of 2020-2021. Today, it has become an enduring feature of the contemporary workplace and an important tool for recruiting and retaining skilled employees who value flexibility and having more autonomy over their weekly rhythm of work.
For employers, however, the shift has created a complex web of tax and regulatory obligations. When an employee works from a different state than your company’s primary location, that presence can create “nexus,” a sufficient connection to trigger tax, payroll, and compliance requirements.
If your team includes remote employees across state lines, it’s essential to understand how nexus works and what you’re obliged to do to stay compliant.
What is nexus—and why does it matter?
Nexus is the legal term used to describe a business’s connection to a state that allows that state to impose tax and regulatory obligations. Historically, nexus was tied to physical locations such as offices, warehouses, or retail stores. Today, a single remote employee working from home may establish nexus for:
- Income or franchise tax
- Sales and use tax
- Payroll tax and withholding
- State unemployment insurance
- Workers’ compensation coverage
In other words, hiring a single remote employee in another state can significantly expand your potential compliance footprint, depending on that state’s specific rules. Some states still have de minimis rules or guidance that limited activity (e.g., purely administrative work) may not trigger income tax nexus, though many do treat even one employee as sufficient.
So how do you assess and mitigate the risks that come with a distributed workforce?
1. Identify where your employees are physically working
The first step is simple but often overlooked: know where your employees are actually working. Employers should maintain up-to-date records of:
- Employee primary residence
- Any secondary work locations
- Temporary relocations (even if just for a few weeks or months)
Even short-term or hybrid arrangements can create state tax obligations in some jurisdictions. Adopting a clear internal policy requiring employees to report changes in work location is essential.
2. Evaluate state income tax withholding requirements
Most states require employers to withhold state income taxes where the employee physically performs services. If you have a remote employee in another state, you may need to:
- Register with that state’s tax agency
- Set up payroll withholding accounts
- File periodic payroll tax returns
Some states have reciprocity agreements, which can simplify withholding requirements for employees who live in one state and work in another. However, these agreements are limited and do not eliminate employer registration requirements in all cases. Enlisting the help of experienced professionals is a worthy investment.
3. Assess corporate income or franchise tax exposure
In many states, having even one employee working within state borders may create corporate income tax nexus. Depending on the nature of the employee’s activities, your company could be required to:
- Register to do business in that state
- File annual income or franchise tax returns
- Apportion income based on multi-state formulas
The rules vary widely by state. Some states are more aggressive than others in asserting nexus. A proactive review with the help of a qualified specialist can prevent surprise assessments later.
4. Don’t overlook sales tax obligations
If your company sells taxable goods or services, remote employees may affect your sales tax exposure as well. After the U.S. Supreme Court’s decision in South Dakota v. Wayfair, states can, in many cases, impose sales tax obligations based on economic activity alone, even without physical presence, subject to each state’s thresholds and rules. Adding physical presence through a remote employee may further solidify your filing requirements. You may need to:
- Register for sales tax collection
- Update tax calculation systems
- File sales tax returns in additional states
Failure to collect and remit sales tax properly can lead to penalties and interest that quickly snowball.
5. Register for state unemployment and workers’ compensation
Employers are typically required to cover employees for state unemployment insurance in at least one state determined under federal and state rules, which often (but not always) aligns with where the employee primarily works. This includes paying state unemployment taxes and filing quarterly wage reports. For employees who work in multiple states, special multistate unemployment rules apply to determine which single state’s system will cover their wages.
Similarly, workers’ compensation coverage must reflect the states in which employees perform services. Your insurance policy may need to be amended to add new states. Ignoring these requirements can create significant risk in the event of an audit or employee claim.
6. Review employment law implications
Remote nexus isn’t just about taxes. State labor laws may apply based on the employee’s location. This can affect:
- Minimum wage and overtime rules
- Paid leave mandates
- Final paycheck requirements
- Noncompete enforceability
A remote employee in another state may subject your company to entirely different employment law standards.
7. Develop a remote work compliance strategy
Rather than reacting to issues as they arise, employers should implement a structured approach:
- Conduct a multi-state nexus study
- Map employee locations against state tax requirements
- Coordinate with payroll providers
- Establish a written remote work policy
- Periodically review state registrations and filings
Regular monitoring is critical. As your workforce evolves, so do your obligations.
The bottom line
Remote work offers flexibility and access to a broader talent pool—but it can also introduce multi-state complexity when remote workers are within the confines of another state’s borders. A single remote employee can trigger tax, payroll, and regulatory obligations in unexpected ways.
By proactively identifying nexus exposure, registering appropriately, and maintaining strong internal controls, employers can avoid penalties and operate with confidence. An experienced accounting advisor and employment law attorney can help you evaluate your multi-state footprint, streamline compliance, and reduce risk—so you can focus on growing your business, not untangling regulatory surprises.