Multi-State Payroll Compliance Checklist: Tax Rules, Labor Laws & Filing Requirements Explained

Multi-state payroll sounds simple on the surface: you hire people in different states and pay them. But the rules under the hood are messy, strict, and always changing. If you skip a step or assume “it’s probably fine,” you can end up with back taxes, penalties, audits, and even lawsuits.

This guide walks you through a clear, practical checklist so you can run payroll across states without losing sleep. You will see what to register, what to track, and what to double‑check before each payroll run.

Table of Contents

Why Multi-State Payroll Compliance Is So Risky

The hidden dangers of hiring across state lines

When you hire someone in a new state, it is not just “add them in payroll and go.” Each state can have its own:

Income tax rules
Unemployment tax rules
Minimum wage and overtime laws
Pay frequency and final paycheck rules
Paid sick leave and family leave laws
Local city or county payroll taxes

Missing even one of these can put you out of compliance. Many states are now using data matching and even automation to find payroll mistakes faster, especially for remote workers.

Why remote hiring changed payroll forever

Remote work broke the old model of “everyone works in the same office, in the same state.” Today, you may have:

One person in California, one in Texas, one in New York
Someone who lives in one state but works in another
Employees who move mid-year but stay on your team
People who split time between several states for travel or projects

Every one of those changes can shift which state gets tax, which wage laws apply, and which agencies expect reports from you.

The real cost of non-compliance

If you pay people in a state without following that state’s rules, you may face:

Back state income tax withholding and penalties
Interest on unpaid state unemployment (SUI) tax
Fines for missing registrations or late filings
Wage claims for underpaid overtime or minimum wage
Lawsuits over missed final pay deadlines or leave rights

In some cases, penalties build up month after month until you fix the problem. That is why catching issues early is much cheaper than “waiting and seeing.”

Who this checklist is for

This article is written for you if:

You run HR or People Ops
You are a founder or small business owner hiring in more than one state
You work in finance or accounting and handle payroll
You are a payroll admin or specialist setting up new states

The goal: give you a clear, checklist so you can spot risks early and build a repeatable process for any new state.

What Is Multi-State Payroll Compliance?

Simple explanation

Multi-state payroll compliance means this:

You correctly withhold, pay, and report all payroll taxes and follow wage and hour laws in every state where your employees work.

That includes:

State income tax
State unemployment insurance tax (SUI)
Local city/county payroll taxes (where they exist)
State labor laws about minimum wage, overtime, pay frequency, and final pay

Why each state operates almost like its own country

There is a federal baseline (like the Fair Labor Standards Act, or FLSA), but states are free to go further. Many do.

For example:

The federal minimum wage is 7.25 dollars per hour, but many states require more.
Federal overtime kicks in after 40 hours per week, but some states also have daily overtime rules.
Some states require paid sick leave. Others do not.
Some cities and counties have their own payroll or local income taxes.

So when you pay someone, you cannot assume, “We already follow federal law, so we’re fine.” The state (and sometimes the city) can demand more.

Federal vs state vs local payroll requirements

You deal with three layers at once:

Federal – IRS, Social Security, Medicare, federal unemployment (FUTA), and federal wage laws like FLSA
State – state income tax, SUI, state wage and hour rules, state new hire reporting, state leave laws
Local – city/county income or payroll taxes in some areas (for example, certain cities in Ohio, Pennsylvania, or California)

You must follow all rules that apply. If a state law is stricter than federal (for example, a higher minimum wage), you follow the stricter rule.

When compliance becomes mandatory

You cannot wait until you have “lots of people” in a state. Usually, you must start the moment you:

Hire your first employee in that state, or
Have an existing employee move there and keep working for you, or
Send someone to work there regularly enough that the state considers you to have “nexus” (tax presence)

The safe rule: as soon as you know someone will regularly work in a state, treat that state as “live” for payroll and compliance.

Step 1: Register Your Business in Each State

State tax registration

Before you run even one payroll in a new state, you usually need to:

Register for a state income tax withholding account (if the state has income tax)
Register for state unemployment insurance (SUI)
Sometimes register for local city/county tax accounts, if the employee’s city has them

Most states will not accept tax payments from you until these accounts exist, so registration is step one.

State income tax accounts

In income-tax states, you must:

Open a withholding tax account with the state’s tax or revenue department
Withhold the correct amount from each paycheck
File returns and pay what you withheld, on the schedule the state gives you (monthly, quarterly, etc.)

State unemployment insurance (SUI) registration

You must also:

Register with the state workforce or labor agency
Get a SUI account number
Pay SUI tax on each employee’s wages, up to that state’s taxable wage limit

Even if you only have one employee in that state, SUI usually still applies.

Withholding account setup

Make sure you:

Know the filing frequency (monthly, quarterly, annual)
Set up electronic filing, if the state requires it
Enter the right state IDs in your payroll system, not just your federal EIN

Nexus rules explained simply

“Nexus” just means: does the state see your business as having a tax presence there? If yes, they expect registration, withholding, and filing.

What creates tax nexus

Common triggers:

Hiring an employee who lives and works in the state
An employee moving into that state and continuing to work for you
Regular in‑person work in that state (traveling staff, sales, training)
Sometimes even a remote contractor or rented workspace can create nexus for other tax types (sales tax, income tax)

For payroll, the biggest trigger is usually where your employees physically do their work, not where your company is based.

Remote employees and nexus risk

If you are fully remote and let people “work from anywhere,” each location they choose can create its own nexus:

A single remote hire in a new state may trigger that state’s payroll and unemployment rules
If they move and you let them keep working, your obligations likely move with them

This is why many companies now require employees to get approval before relocating to a new state.

Common mistakes employers make

Running payroll before state registration is complete
Assuming “contractor” status avoids state registration (it often does not if they should be an employee)
Not tracking where hybrid or traveling employees actually work
Forgetting about local tax registrations when cities require them

Step 2: Understand State Income Tax Withholding Rules

States with no income tax

Some states have no state income tax on wages. As of 2026, these include:

Alaska
Florida
Nevada
New Hampshire (no tax on wages)
South Dakota
Tennessee
Texas
Washington
Wyoming

If your employee lives and works in one of these states, you usually do not withhold state income tax for that state.

Why that doesn’t mean zero compliance

No income tax does not mean:

No SUI
No local taxes
No wage and hour rules
No reporting

You may still need:

SUI registration and payments
Workers’ compensation coverage
New hire reporting
To follow that state’s labor laws (minimum wage, overtime, final pay, etc.)

Reciprocity agreements

What they are

State tax reciprocity agreements are deals between states that say:

If you live in one state and work in the other, you only pay state income tax to your home state.

In those cases, the work state usually stops withholding once the employee files a special exemption form.

When employees live in one state and work in another

Example:
Your employee lives in Maryland and works in Washington, D.C. These two have reciprocity. The employee:

Files the D.C. exemption form
You stop withholding D.C. tax
You withhold Maryland state tax instead

Without the form, you must withhold for the work state. The employee may later file returns to get a refund, but this creates extra work and confusion.

How to handle reciprocal withholding

Your steps:

Check if the home and work states have reciprocity.
If yes, ask your employee to complete the correct exemption form for the work state.
Keep the form on file and set your payroll system to withhold for the resident state only.
Review yearly, as reciprocity rules can change.

Local and city taxes

States with local payroll or income taxes

Some states allow cities or local areas to add their own payroll or income tax, such as:

Parts of Pennsylvania, Ohio, and Michigan
Certain cities and counties in California and other states

These may require separate registrations and returns.

Why employers often miss this

Common reasons:

Most guidance focuses on state and federal rules, not local ones
Payroll teams assume “state registration is enough”
Local taxes show up as small amounts and are easy to overlook

Compliance risks

Missing local tax can lead to:

Local penalties and interest
Notices sent to your business or even to your employee’s home
Extra year-end corrections and amended W‑2s

Step 3: Comply With State Wage & Hour Laws

Minimum wage differences

Federal vs state minimum wage

Federal minimum wage is 7.25 dollars per hour, but many states and cities require more.

You must always pay at least the highest minimum wage that applies among:

Federal
State
City/county

So if the city has the highest rate, that is the one you follow.

What happens when they conflict

If federal says 7.25 dollars, your state says 12 dollars, and the city says 14 dollars, you must pay at least 14 dollars. Paying less can lead to wage claims and penalties.

Overtime rules by state

States with stricter overtime laws

Federal overtime is:

Time‑and‑a‑half after 40 hours in a workweek for most non‑exempt employees.

Some states add extra rules, like:

Daily overtime after 8 or 12 hours
Different rules for certain industries or shift patterns

Daily overtime vs weekly overtime

You may need to pay both if required:

Daily overtime (for example, after 8 hours in a day)
Weekly overtime (after 40 hours in a week)

Your payroll system must track hours by day and by week, per employee, per location, and apply the stricter rule where required.

Pay frequency laws

Weekly, bi-weekly, semi-monthly requirements

Some states are flexible. Others require certain pay schedules. Rules can include:

Minimum pay frequency (for example, at least semi‑monthly)
Different rules for hourly vs salaried employees
Rules on how soon wages must be paid after the pay period ends

States with mandatory pay schedules

Many states require:

At least semi‑monthly or bi‑weekly pay
Faster schedules for certain industries (like manual labor)

If you run one standard payroll cycle nationwide, check that it meets the strictest state’s rules where you have employees.

Final paycheck rules

Immediate payment states

Some states require final wages:

On the last day worked, if the employee is fired
Within a very short time after separation for resignations

Others allow payment on the next regular payday. You must know the rules for the state where the employee worked.

Deadlines after termination

This is a common lawsuit trigger. If you pay too late, you may owe:

Penalties per day of delay
Extra “waiting time” wages
Interest and legal fees

Step 4: Handle State-Specific Employment Requirements

New hire reporting

Every state requires you to report new hires (and often rehires) to a state agency, usually within a set number of days.

State reporting deadlines

Typical deadlines:

Within 20 days of hire, or
Within shorter timeframes in some states

Check each state’s rule and set an internal deadline that is earlier than the legal limit.

What information is required

States usually want:

Employee name, address, and Social Security number
Employer name, address, and FEIN
Date of hire
Sometimes additional data like work state or payment type

Workers’ compensation insurance

Mandatory coverage rules

Most states require you to carry workers’ compensation insurance once you reach a certain number of employees in that state (often one or more).

Even if:

You are fully remote
Employees work from home
You think their job is low‑risk

The state may still require coverage.

State-specific thresholds

Thresholds vary:

Some states: coverage once you hire your first employee
Others: coverage after a few employees
Some have special rules for family members or owners

If you skip this, you can face:

Fines
Liability for workplace injuries out of pocket
Possible stop‑work orders

State disability insurance (where applicable)

States requiring SDI

A handful of states and D.C. require some form of state disability insurance or paid family and medical leave funded by payroll deductions or employer contributions. These include states like California, New York, New Jersey, and others with state-level paid family or disability programs.

Employer and employee contributions

In these states:

You may need to withhold a set percentage from employee wages
You may also owe an employer share
You must register, file returns, and send in the money on time

Your payroll system should handle these automatically once you turn on the correct state program.

Step 5: Manage Multi-State Payroll Taxes Correctly

State unemployment insurance (SUI)

How rates differ by state

Each state sets its own:

Taxable wage base (the maximum wage per employee that SUI applies to)
SUI rate for your business, based on your industry and claims history

So you cannot copy rates from one state to another.

How rates change annually

States often send new SUI rate notices each year. You must:

Update your payroll settings
Check that the correct rate applies from the correct date
Store notices for audit support

Multi-state employees (working in more than one state)

Primary work location rules

For unemployment (SUI), you pay to only one state per employee, even if they work in many states.

To decide which state, states follow a series of tests (the “localization of work” rules), usually in this order:

Where the work is mostly performed
If not localized, where the base of operations is
If that is unclear, where direction and control come from
If still unclear, the employee’s state of residence

How to determine withholding state (income tax)

For income tax withholding, you look at:

The employee’s work state and its rules
Any reciprocity with the employee’s home state
Sometimes resident state credits for taxes paid to another state

In practice:

If no reciprocity: you withhold for the work state; the employee handles any resident state filing and credits
If reciprocity: you usually withhold for the home state after they file the right form

Year-end reporting

Multi-state W‑2 filing

If employees worked in more than one state in a year, their W‑2 may show:

Wages and tax withheld for each state
Local wages and tax, if local taxes apply

You may also need to:

File W‑2s with each state
File electronic files through state portals or combined federal/state systems

1099 considerations

For contractors, some states:

Require 1099 filing directly with the state
Have separate electronic filing thresholds
Use 1099 data to look for misclassification or missing withholding

State reconciliation forms

Many states require annual reconciliation returns that:

Match total wages and withholding to your W‑2 totals
Confirm that what you paid through the year equals what should have been paid

Missing reconciliation forms is a common reason states send notices, even if all payments were made.

Step 6: Track Leave Laws and State Mandates

Paid sick leave laws

States with mandatory paid leave

There is no federal law requiring paid sick leave for private employers, but many states and cities do. As of 2026, at least 17 states plus Washington, D.C. have statewide paid sick leave laws, including:

Alaska
Arizona
California
Colorado
Connecticut
Illinois
Maine
Maryland
Massachusetts
Michigan
Minnesota
Nebraska
Nevada
New Jersey
New Mexico
New York
Oregon
Rhode Island
Vermont
Washington
Washington, D.C.

Some cities and counties also have their own, stricter rules.

Accrual rules

Common patterns:

1 hour of paid sick leave for every 30–40 hours worked
Caps on yearly accrual and carryover
Waiting periods before employees can use leave

Each state (and many cities) set their own exact rules.

Family & medical leave variations

State-level paid family leave programs

Some states run paid family and medical leave or disability programs funded through payroll. They often cover:

Bonding with a new child
Serious health conditions
Care for a sick family member

You must:

Register for the program
Withhold the right percentage from wages
Pay any employer share
Give notices to employees about their rights

PTO policy adjustments

How state laws affect your handbook

If your company handbook has one PTO or sick leave policy for everyone, you may need to:

Add state-specific sections
Track leave balances separately by state
Make sure you do not give less than the law requires in any state

In some states, unused sick time must carry over or be restored if an employee is rehired. Your policy and your payroll system need to support that.

Step 7: Avoid Employee Classification Mistakes

Employees vs independent contractors

Why classification matters more across states

If you wrongly treat someone as a contractor when they should be an employee, you can miss:

State income tax withholding
SUI payments
Workers’ compensation coverage
Paid sick leave, overtime, and other rights

States are very active in enforcing these rules, and some have stricter tests than federal law.

States with stricter contractor tests

Certain states use strong tests (like “ABC tests”) that make it harder to treat workers as contractors. Under these tests, you often must show that:

The worker is free from your control
Their work is outside your usual business
They run an independent business

If you fail, the worker is an employee for that state’s laws.

Remote worker classification risks

Common audit triggers

Large numbers of “contractors” doing the same work as employees
Contractors working only for you, for long periods, with set hours
Contractors living in states known for strict enforcement

If a state reclassifies contractors as employees, you may owe:

Back taxes and SUI
Penalties
Back wages, overtime, and benefits

Step 8: Maintain Proper Payroll Records

Recordkeeping requirements by state

You must keep payroll records long enough to satisfy both federal and state laws.

Federal FLSA rules generally require at least 3 years for payroll records such as:

Hours worked each day and week
Wages paid
Deductions and additions
Pay periods and pay dates

Many states require similar or longer record retention. Some also have special rules for leave, overtime, or unemployment records.

A safe practice is to:

Keep core payroll records at least 3–4 years
Keep unemployment, tax, and certain HR files up to 7 years, depending on your risk comfort and local rules

Audit preparation checklist

Reports you should always have ready

Keep these easy to pull, by state and by period:

Employee list with states of residence and work
Registration numbers for withholding, SUI, and local taxes
Payroll registers with wages, hours, and taxes for each state
SUI rate notices and setup details
Copies of returns and payment confirmation receipts
New hire reports and confirmation numbers
Leave accrual and usage reports in states with sick leave or paid family leave

Internal payroll audit tips

At least once a quarter:

Check that every state where you have workers has registrations in place
Confirm tax IDs and rates in your payroll system
Spot-check that taxes are going to the correct state and local agencies
Review wage and hour rules for any new states
Confirm your list of paid sick leave and family leave states is current

Common Multi-State Payroll Compliance Mistakes

Here are traps you should actively avoid:

Assuming payroll laws are uniform
Treating every state like your “home” state, without checking differences.
Not updating state tax rates annually
Forgetting new SUI rates or tax brackets and using last year’s settings.
Forgetting to register before first payroll
Paying someone before you have withholding and SUI accounts can trigger back registration, penalties, and messy corrections.
Ignoring local taxes
Overlooking city or county taxes that require separate setup and filing.
Misclassifying remote workers
Calling workers “contractors” to skip payroll when state tests say they are clearly employees.

Should You Use Payroll Software to Stay Compliant?

Manual payroll vs automated payroll

If you try to manage multi-state payroll in spreadsheets, you must:

Track every state’s rates and rules
Update manually when laws change
Calculate taxes, SUI, and leave balances yourself

Simple mistakes (like one wrong rate, one missed registration) can cost a lot later.

Good payroll software that supports multi-state rules can:

Apply correct tax rates by location
Handle local taxes where supported
Automate many filings and payments
Reduce math and data entry errors

Risk comparison & error rate differences

Manual processes often lead to:

Higher error rates
Late filings because someone missed a deadline
Poor tracking of where people actually work

Automated systems, when properly set up:

Apply rules consistently
Prompt you for new registrations when you add a state
Help you produce W‑2s and state reports correctly

What to look for in multi-state payroll software

When you compare tools, look for:

Automatic tax updates – system updates state and local rates without you keying them in
State compliance monitoring – alerts when you hire in a new state, and guidance on registrations
Support for local taxes – especially if you have employees in states with many local taxes
Multi-state W‑2 processing – ability to show multiple states on one W‑2 and e‑file to states
Leave tracking by jurisdiction – sick leave, paid family leave, and local leave rules
Strong reporting – by state, by tax, and by employee

You still need to understand the basics, but software can handle the heavy lifting so you are not manually tracking 50 sets of rules.

Multi-State Payroll Compliance Checklist

Use this as your quick reference before you run payroll in a new state:

✔ Register for state income tax withholding accounts (if the state has income tax)
✔ Register for state unemployment insurance (SUI) in every state where employees work
✔ Check nexus and confirm when a remote hire or relocation triggers registration
✔ Verify minimum wage and ensure your pay rates meet the highest applicable rate (federal, state, local)
✔ Confirm overtime rules (weekly and, if applicable, daily overtime)
✔ Confirm pay frequency and final paycheck timing requirements
✔ Set up local city/county tax withholding where required
✔ Report new hires to each state on time
✔ Confirm workers’ compensation coverage in every state where you have employees
✔ Check if the state requires disability insurance or paid family leave contributions
✔ Apply reciprocity rules where employees live in one state and work in another (and collect exemption forms)
✔ Set up paid sick leave tracking in states and cities that require it
✔ Review and adjust PTO and leave policies to meet state minimums
✔ Validate employee vs contractor classification, especially for remote workers
✔ Confirm SUI rates and taxable wage bases are updated each year
✔ Prepare for multi-state W‑2 and any state reconciliation forms at year‑end
✔ Keep payroll and time records for at least 3 years (or longer if state rules require)
✔ Run quarterly internal payroll audits to confirm registrations, rates, and filings

FAQs

1. Do I need to register in every state where employees live?

Usually, you must register in every state where employees work, not just where they live.

But in practice:

If they live and work in that state: yes, you register there.
If they live in one state but regularly work in another: the work state almost always expects registration and withholding.
Some states with reciprocity agreements may allow you to withhold only for the resident state (after the correct forms are filed).

So: focus on where work happens, then check residency and reciprocity.

2. What happens if an employee moves to another state mid-year?

You should:

Find out before the move date.
Register in the new state (withholding and SUI) if you are not already registered.
Update your payroll system with the new work state, tax accounts, and SUI rate.
Stop withholding for the old work state and start for the new one from the move date.
At year-end, issue a W‑2 that shows wages and tax for each relevant state.

You may also need to adjust unemployment tax reporting based on “localization of work” rules.

3. Can payroll software automatically handle state compliance?

Good software can handle a lot, including:

Applying state and local tax rates
Updating tax tables
Calculating SUI and generating returns
Handling multi-state W‑2s

But you still must:

Turn on the right states and enter registration IDs
Watch for employees moving or working in new states
Check that your policies (wage rates, leave, pay frequency) match each state’s rules

Think of software as your “engine,” but you are still the “driver.”

4. How often do state payroll laws change?

State payroll rules can change every year, and sometimes mid-year:

Minimum wage increases
New paid sick leave laws or expansions
Changes to SUI rates and wage bases
New local taxes or rule changes

Build a habit of:

Reviewing state updates at least once or twice a year
Relying on your payroll provider’s alerts and newsletters
Running periodic compliance checks, especially if you are rapidly hiring in new states

Final Thoughts

Multi-state payroll compliance is not a one-time project. It is an ongoing process that grows as your team grows. Every new hire, every move, and every policy change can affect your obligations.

You do not need to memorize every law in all 50 states. But you do need:

A clear checklist (like the one above)
A habit of registering early, not after problems appear
Payroll tools that stay up to date on tax and leave rules
Regular internal reviews to catch issues before states do

Automation cannot replace your judgment, but it can reduce your risk, cut down on manual work, and help you stay ahead of law changes instead of constantly reacting to notices.

If you follow the steps in this guide each time you enter a new state, you will be far ahead of most employers—and much less likely to get surprise letters, audits, or penalties down the line.