How to hire remote employees without tax and payroll surprises

Remote work is here to stay. Your best candidate might live in Texas while your office is in California. Your top developer might want to move to Colorado next year.

That's great for talent—and complicated for taxes.

Every state where you have employees creates new tax obligations. Miss them and you'll face penalties, back taxes, and headaches you don't need.

Here's how to hire remote workers without tax surprises.

Register your business for every state when hiring remote employees

Hire someone in a new state? Registering before onboarding a remote employee ensures your business meets state requirements for income tax filing and reporting unemployment taxes. Skipping this step can result in penalties and back taxes.

This covers:

• Payroll tax withholding
• Unemployment insurance
• State income tax filings
• Worker's compensation (sometimes)

Start early. State tax agencies are swamped with remote work registrations. What used to take two weeks can now take two months.

Don't wait until your new hire's first day. Begin the registration process as soon as you make an offer to someone in a new state.

Income tax withholding rules

States calculate income tax withholding differently depending on employee location and compensation. Understanding how tax brackets apply to your team’s taxable income ensures accurate withholding and avoids penalties.

Your payroll provider should handle this automatically once you're registered. But you need to make sure they know about every state where you have employees.

Track employee moves. That developer who relocated to Colorado? You need to update their withholding immediately, not at year-end.

City taxes and payroll obligations

Some cities impose their own taxes on top of state requirements. New York City has a separate income tax for employees who work there. San Francisco collects a payroll tax based on total compensation.

Most cities with employee taxes are in California and New York, but check any major city where you have remote workers.

How nexus impacts remote worker payroll tax

"Nexus" means you have enough business activity in a state to create tax obligations. Even a single remote employee can create nexus in a state, triggering income tax withholding, unemployment taxes, and additional income tax filing responsibilities depending on local rules.

One employee usually creates nexus for:

• Income tax withholding
• Unemployment taxes
• Potential corporate income tax filing

But rules vary by state. Some require corporate tax filings with just one employee, others have higher thresholds.

Plan for temporary vs permanent moves

Temporary assignments often don’t trigger full state obligations, but permanent relocations require updated income tax withholding and unemployment taxes reporting. Tracking your remote employees’ locations is critical to avoid surprises.

Temporary assignments: Often 30-90 days before triggering new state obligations

Permanent moves: Create immediate tax requirements

Ask employees about their plans. A temporary stay might not require full state registration. A permanent move definitely does.

Common remote work tax mistakes

Assuming contractors solve everything. Independent contractors create their own compliance issues. Employee classification matters more than location.

Ignoring local taxes. State registration is just the start. Some cities and counties have additional requirements.

Waiting until year-end. Tax obligations start when employees do, not at tax time.

Using the wrong payroll provider. Make sure yours can handle multi-state payroll before you hire remotely.

Cost considerations for hiring remote workers across states

State registration fees typically run $50-500 per state. Ongoing compliance varies but budget for:

• Monthly payroll tax filings
• Quarterly unemployment reports
• Annual reconciliations
• Potential corporate tax returns

.Every additional state adds layers of complexity for income tax withholding, unemployment taxes, and ongoing income tax filing. The real cost is managing multi-state compliance efficiently.

Get expert help for remote worker payroll tax

Multi-state payroll and tax compliance isn't a DIY project. The rules change constantly and penalties add up fast.

Work with:

• A payroll provider that handles multi-state compliance
• An accountant familiar with remote work tax issues
• Legal counsel for employee classification questions

Your remote hiring checklist

This checklist ensures hiring remote workers is done correctly, including updating income tax filing, verifying unemployment taxes, and registering your business in new states before onboarding a remote employee:

1. Confirm they're an employee, not a contractor
2. Research that state's employment tax requirements
3. Check for city-level taxes where they'll work
4. Start business registration process
5. Update your payroll system
6. Verify worker's compensation coverage
7. Review your employment policies for state law compliance

Hiring remote employees without tax surprises

Remote work opens up talent pools but creates tax complexity. Plan ahead, register properly, and get professional help.

The best remote employees are worth the extra compliance work. Just don't let tax issues surprise you later.

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Managing multi-state payroll and tax compliance? Pilot handles complex tax situations so you can focus on growing your team. Talk to our tax experts about keeping your remote workforce compliant.‍