How to Run Payroll for Remote Employees in Different States (Without Compliance Mistakes)

Remote hiring feels simple: you find the right person, send an offer, and they start work from wherever they live.

Payroll is where it stops being simple.

The moment you have people in different states, every paycheck can touch:

Different state income tax rules
Different unemployment tax rules
Different wage, overtime, and leave laws
Sometimes even city or county taxes

In many states, just one remote employee is enough to create a tax and payroll “footprint” that forces you to register and follow that state’s rules.

If you ignore this and just keep paying everyone as if they work at HQ, you can run into:

Surprise tax bills and penalties from states
Payroll tax audits that eat months of your time
Angry employees who get double-taxed or can’t claim benefits
Problems in due diligence if you want to raise funding or sell the company

This guide is for you if you:

Run HR or payroll for a small or mid‑size company
Are a founder who just hired (or wants to hire) in another state
Work in finance and need to clean up multi‑state payroll
Are moving from “everyone in one office” to a remote or hybrid team

You’ll walk through each step in so you can pay your people correctly and sleep at night.

Table of Contents

What Happens When an Employee Works in Another State?

Work Location vs Company Location

Here’s the first mental shift you need to make:

For payroll, where your employee actually works usually matters more than where your company is based.

Most states say you must:

Withhold state income tax based on the state where the employee physically performs work
Pay state unemployment tax in the state where the employee works (with special rules for people working in more than one state)

So if your company is in New York and you hire someone who lives and works full‑time in Colorado, Colorado’s rules generally control their payroll taxes and many of their labor protections.

State Tax Basics (Explained Simply)

When you pay an employee, you usually deal with three main layers:

Federal taxes
- Same rules for everyone in the US (income tax, Social Security, Medicare).
State taxes
- State income tax (if the state has one).
- State unemployment tax, paid by you as the employer.
Local taxes
- Some cities and counties charge extra taxes on top of the state tax.

Most states expect you to:

Register as an employer in that state
Withhold the right state income tax from paychecks
File tax returns and send in the money on a fixed schedule

When Payroll Obligations Begin

In many states, your obligations start as soon as you hire your first employee there. That can mean:

Registering before the very first paycheck in that state
Getting a state employer ID and unemployment account number
Setting up workers’ compensation insurance if required

Some states have small exceptions (for example, workers’ comp only after a certain number of employees), but many treat one employee as enough to trigger several rules.

Practical tip:
As soon as you decide to hire in a new state—or an existing employee moves—start the registration process right away. Some state approvals take weeks.

Step 1: Register in the Employee’s Work State

Once you confirm that an employee will regularly work from another state, your first job is to register there.

You’re usually looking at three main registrations:

State income tax withholding
State unemployment insurance (SUI)
Workers’ compensation

State Income Tax Withholding Registration

When is this required?

Most states with an income tax require you to:

Register for an employer withholding account, and
Withhold state income tax once an employee performs work in that state.

You generally cannot just withhold tax for your HQ state and ignore the employee’s state. That’s one of the most common multi‑state mistakes.

States without income tax

A handful of states do not tax wage income at the state level, including:

Alaska
Florida
Nevada
South Dakota
Tennessee (on wages)
Texas
Washington
Wyoming
New Hampshire (mostly for interest/dividends)

If your remote employee works only in one of these states, you don’t withhold state income tax for that state—but you may still need:

State unemployment registration
Workers’ comp coverage
Local tax handling (for example, certain local payroll taxes in parts of Washington or Oregon)

State Unemployment Insurance (SUI)

State unemployment taxes fund unemployment benefits. Nearly all states require you to:

Set up a separate SUI account in each state where employees work, and
Report wages and pay unemployment tax to one state for each employee, based on specific rules.

Key points:

For a simple, single‑state remote worker, their SUI is usually owed to their work state.
For employees who work in more than one state, there’s a standard test (used by most states) to decide which state gets their unemployment wages.
SUI rates vary a lot by state and by your experience (layoffs, claims, etc.). Some states have a tax range that spans more than 10 percentage points.

Why you can’t ignore SUI

If you skip SUI registration:

The state can bill you for back taxes plus penalties and interest
Former employees may not get unemployment benefits, which can lead to complaints and further audits
Some states can file liens or take other enforcement actions

Workers’ Compensation Requirements

Workers’ comp covers employees who get hurt or sick because of their job. Almost every state:

Requires employers to carry workers’ comp once they hit a certain number of employees
Has its own threshold: some require coverage from the first employee, others at 2, 3, 4, or 5 employees
Has its own agency or board enforcing the rules

Examples:

California, Arizona, New York: usually require workers’ comp once you have at least one employee.
Alabama, Mississippi, Missouri: often require coverage only once you have five or more employees.
Texas: is the one major state that does not generally require private employers to buy workers’ comp, though many still do.

Penalties for not carrying required workers’ comp can include fines and, in some states, even criminal charges.

Step 2: Determine the Correct State for Tax Withholding

Now that you’re registered, you need to be sure you’re taking tax from the right state(s) for each employee.

Single‑State Remote Worker

If an employee lives and works in the same state, and only works there, things are usually straightforward:

You withhold income tax for that state (if it has one)
You pay unemployment tax for that same state
You follow that state’s wage, overtime, and leave laws

Example:
Your HQ is in New York, your employee lives and works fully remotely in Minnesota. You:

Register in Minnesota
Withhold Minnesota state income tax
Pay Minnesota unemployment tax
Follow Minnesota wage and leave laws

HQ location rarely decides anything by itself.

Employees Who Move Mid‑Year

Remote employees move often. When that happens, you need to:

Find out exactly when they moved and when they started working from the new state.
Stop withholding for the old state as of the move date (or the first workday in the new state).
Start withholding for the new state as soon as registration is active.
Update payroll records (address, work location, tax profiles) so year‑end reports split wages correctly.

At year‑end:

Their W‑2 may show income in two different states, one for each period.
They may have to file tax returns in two states.

Failing to update withholding after a move is one of the biggest real‑world mistakes with remote teams.

Employees Working in Multiple States

Some employees:

Travel regularly
Split time between two offices
Serve clients in several nearby states

For these people, you must decide which state (or states) get income tax withholding and unemployment reporting.

The “primary work location” idea

Most companies use a “primary work location” framework based on:

Where the employee spends most of their time
Where their work is mainly directed or controlled
State rules on how to withhold in multi‑state situations

Unemployment uses a specific test order: where work is “localized,” where their base of operations is, where direction and control happen, and, if needed, where the employee lives.

You generally report unemployment to one state only, even if they work across borders.

“Convenience of the employer” states

A handful of states have a special rule called the “convenience of the employer” rule.

In these states, if your company is based there, they may tax the employee as if they worked in the company’s state, even when the employee works from another state, if the remote work is mainly for the employee’s convenience, not a business necessity.

As of 2025, some form of this rule exists in eight states:

Alabama
Connecticut
Delaware
Nebraska
New Jersey
New York
Oregon (limited, usually for certain nonresident managers)
Pennsylvania

These rules can create double taxation risks if you don’t handle them carefully. You often need tax advice for any employee living in one state and working for a company based in one of these.

Reciprocity agreements

Some state pairs have reciprocity agreements. These agreements say:

If an employee lives in one state and works in another, they only pay income tax to their home state, not the work state—if they file the right exemption form.

This is common in parts of the Midwest and Mid‑Atlantic. Examples include:

Employees who live in Pennsylvania and work in New Jersey
Employees who live in Maryland and work in D.C. or Virginia
Various cross‑border pairs involving Illinois, Indiana, Kentucky, Michigan, Ohio, West Virginia, Wisconsin, and others

If reciprocity applies:

You withhold tax for the home state only
The employee must sign the relevant exemption form for the work state (for example, a state‑specific nonresident exemption form)

If there is no reciprocity, you often withhold in the work state, and the employee claims a credit on their home‑state return so the same income isn’t taxed twice.

Step 3: Understand State‑Specific Wage & Labor Laws

Getting the right tax state is only half the battle. You also have to respect the wage and hour rules where your employee works.

Minimum Wage Differences

Each state sets its own minimum wage; many cities add their own higher minimum.

If federal and state (or local) minimum wages conflict, you must pay the highest applicable rate.

Example:

Federal minimum: 7.25
State minimum: 14.00
City minimum: 16.00

If your employee works in that city, you must pay at least 16.00.

Multi‑state teams often have different pay floors just based on location.

Overtime Law Variations

Federal law requires you to pay overtime (1.5x) after 40 hours in a workweek for non‑exempt employees.

Some states add extra protections.

Daily overtime states

A small group of states require overtime when employees work more than a certain number of hours in a single day, not just per week.

States with daily overtime rules include at least:

Alaska
California
Colorado
Nevada

Some guidance also notes daily‑style triggers or special rules in Oregon.

In California, for example:

1.5x pay after 8 hours in a day
2x pay after 12 hours in a day
Extra rules for the 7th consecutive day of work

If you treat a California remote worker like a Texas worker, you’ll nearly always underpay overtime.

Pay Frequency Requirements

States can also control how often you must pay employees. Some require:

At least twice a month
Weekly for certain kinds of workers
Specific paydays or rules for final paydays

These rules vary heavily; you need to check the state where the employee works.

Final Paycheck Deadlines

When someone leaves, you must meet that state’s deadline for final pay.

Examples of how strict this can be:

Some states require immediate payment if the employee is fired; others allow a few days.
Some allow payment on the next regular payday if the employee resigns; others set a shorter deadline.

Missing these deadlines can lead to penalties, including “waiting time” penalties in places like California.

Because these wage rules change often, always confirm details with up‑to‑date state guidance or a trusted legal/payroll resource before you set policies.

Step 4: Handle Local and City Taxes

State rules are only part of the story. Some states also allow local income or payroll taxes at the city or county level.

States where local income‑type taxes are common include:

Pennsylvania – many municipalities charge an “earned income tax” that employers must withhold.
Ohio, Michigan, Indiana, Kentucky – lots of cities and local areas with their own income or occupational taxes.
Maryland – all counties plus Baltimore City have local income taxes.
New York – New York City and Yonkers have extra local income taxes.
Colorado, Kentucky, Alabama, Missouri, Oregon, New Jersey – various local or city‑level payroll or occupational taxes.

Why local taxes are often missed

Local taxes are easy to ignore because:

They don’t always show up clearly when you first register with the state
Many payroll teams assume “state registration + state income tax = done”
Some local taxes are based on where the employee lives, some on where they work, and some on both

Compliance risks of ignoring city taxes

If you skip local taxes where they apply:

The local government can bill you for back withholding, interest, and penalties
Your employee can be stuck with big local tax bills at filing time, which hurts trust
Some localities can go after your business directly for unpaid employer taxes

When you hire or move an employee, always ask:
“Does this city or county have its own income or payroll tax?”

Step 5: Manage Leave Laws for Remote Employees

Leave is another area where state and local rules differ a lot. Remote employees might have rights to paid sick time or paid family leave that people at HQ do not.

Paid Sick Leave Mandates

There is no general federal law requiring paid sick leave for private employers. Instead, states and cities set their own rules.

As of 2025–2026, around 17 states plus Washington, D.C. require employers to provide paid sick leave, including:

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

Many cities and counties in these and other states have their own local sick leave rules too.

Common patterns include:

Minimum accrual rate (for example, 1 hour per 30 hours worked)
Caps on annual use or total accrual
Rules on carryover from year to year
When you can require a doctor’s note

If a remote employee works in one of these places, you must build those rules into your PTO or sick policy just for them.

Paid Family Leave Programs

Paid family and medical leave (PFML) is different from sick time. It usually gives wage replacement for:

Bonding with a new child
Caring for a seriously ill family member
Recovering from your own serious health condition
Sometimes for safety‑related reasons (domestic violence, etc.)

As of 2025, 13 states plus D.C. have mandatory, statewide paid family leave systems, funded by payroll contributions from employees, employers, or both. These include:

California, Connecticut, Massachusetts, New Jersey, Rhode Island, Washington
New York (through regulated private insurance)
Newer programs in Colorado, Delaware, Maine, Maryland, Minnesota, Oregon, and D.C.

These programs usually:

Require you to withhold a small percentage of wages for the state program (and sometimes add an employer contribution)
Give employees a right to paid, job‑protected leave for covered reasons
Have their own reporting and payment schedules

If you have a remote worker in one of these states, your payroll must:

Withhold the correct PFML contributions
Show them correctly on pay stubs and year‑end forms
Coordinate PFML with your own company leave policies

Updating Employee Handbooks for Remote Workers

Once you have people in more than one state, a single, simple handbook often isn’t enough.

You’ll usually need:

A core handbook that applies to everyone
State‑specific addenda covering:
- Minimum wage and overtime differences
- Paid sick leave and PFML rights
- Local rules (for example, extra paid breaks or scheduling rules)

Your remote employees should be able to see exactly what rights they have in their state.

Step 6: Avoid Employee Classification Mistakes

Remote work makes it tempting to call people “contractors” instead of employees. That can backfire badly.

Remote Employees vs Independent Contractors

Many companies try to avoid multi‑state payroll hassle by:

Hiring remote workers as contractors
Paying them via invoice or through a marketplace
Treating them like full employees in daily reality

If the person is legally an employee, but you treat them as a contractor, you risk:

Owing back payroll taxes
Overtime and benefits claims
Penalties from both federal and state agencies

Remote work does not change the legal tests. It just makes misclassification more tempting.

States with Strict Contractor Tests

Some states use tougher tests (like “ABC tests”) that make it very hard to justify contractor status if:

The worker does tasks that are part of your main business
You control how and when they work
They don’t run a true independent business

States like California and others have well‑known strict rules, and more states are tightening tests over time.

Audit Triggers to Avoid

Red flags that can draw attention:

Lots of “contractors” doing the same work as your employees
Contractors who work only for you, full‑time, for months or years
Former employees re‑hired as contractors in the same role
Workers in strict states with no payroll registration, but regular payments

If in doubt, treat someone as an employee and put them on proper payroll.

Step 7: Year‑End Reporting for Multi‑State Remote Workers

Year‑end reporting gets more complex when one employee has wages in several states.

Multi‑State W‑2 Preparation

For employees who worked in more than one state during the year, their W‑2 often shows:

Separate lines for wages and tax withheld in each state
State codes that match where tax was withheld

Common multi‑state W‑2 cases:

Employee moved from one state to another mid‑year
Employee commuted across state lines (with or without reciprocity)
Employee worked in a convenience‑rule state and their home state

If you do not track work locations and moves carefully during the year, it’s almost impossible to cleanly fix this at year‑end.

1099 Reporting Considerations

For true independent contractors:

You may owe state‑level reporting in addition to the federal 1099‑NEC or 1099‑MISC
Some states require you to send copies of 1099s or separate reports if the contractor lives there or did work there

Again, the contractor’s location can trigger state‑level reporting.

State Reconciliation Forms

Many states require annual reconciliation of withholding:

You compare the total tax withheld on all W‑2s for that state with the total of all deposits you made during the year
You fix small differences and confirm totals match

If you’ve withheld the wrong state’s tax, these forms are where the mismatch becomes obvious to the state.

Common Payroll Mistakes with Remote Employees

Here are the most frequent—and painful—mistakes:

Forgetting to register before first payroll
- Paying a new remote employee without setting up that state’s accounts first.
Not updating tax withholding after relocation
- Employee moves states, but you keep withholding for the old state for months.
Ignoring local taxes
- Missing city, county, or school district taxes in places like Pennsylvania, Ohio, Maryland, New York, and others.
Misclassifying contractors
- Calling full‑time, long‑term remote workers “contractors” to avoid payroll.
Assuming payroll software handles everything automatically
- Many systems can support multi‑state payroll, but only if you set them up correctly and register in each state first. They can’t decide where you have to register or whether a worker is really a contractor.

Should You Use Payroll Software for Remote Multi‑State Teams?

You can run multi‑state payroll manually, but it gets risky fast.

Manual Payroll Risks

If you try to manage everything in spreadsheets or with simple tools, you face:

Higher error rates when calculating state and local taxes
Missed registration steps in new states
Late filings, missed deposits, and penalties
Huge year‑end reconciliation headaches

What to Look for in Payroll Software

If you’re paying people in more than one state, look for payroll software that can:

Support all 50 states (and D.C.) with:
- State income tax tables
- State unemployment options
- Local tax support where needed
Handle multi‑state withholding
- Assign different tax profiles per employee
- Split wages for moves or multi‑state workers
Update state tax rules automatically
- New rates, thresholds, and local tax changes are applied without manual updates
Provide compliance alerts
- Warnings if a new work location suggests registration needs
- Reminders about deposit deadlines and filings
Automate year‑end forms
- W‑2s that correctly show multiple states
- State copies and annual reconciliations where required

You still need to:

Decide where you must register
Enter the correct work locations
Keep up with major legal changes

But good software can handle the math and daily details.

(This is a natural place to link back to your main “Payroll Software for Multi‑State Employers” pillar page.)

Payroll Software vs PEO vs EOR for Remote Workers

You don’t have to handle everything alone. Three main models exist:

Payroll software
PEO (Professional Employer Organization)
EOR (Employer of Record)

When Payroll Software Is Enough

Payroll software is usually a good fit when:

Your company is legally set up in the US
You’re comfortable registering in each state where employees live and work
You want to keep full control over HR policies and employment contracts
Your team is growing but still manageable in size

You stay the legal employer. The software just helps you do payroll and basic HR more safely.

When a PEO Makes Sense

With a PEO:

You and the PEO become co‑employers
The PEO often handles payroll, tax filings, benefits administration, and some compliance work
You still direct day‑to‑day work and hiring decisions

A PEO makes sense if:

You want group benefits and HR support without building a full in‑house HR team
You have employees in several states and want help managing registrations and filings
You still want your own US entity and control, but less admin

When an Employer of Record (EOR) Is Necessary

An EOR becomes the legal employer on paper. You direct the person’s work, but:

The EOR signs the local employment contract
The EOR handles payroll, taxes, and compliance under local law

EORs are most common for:

Hiring in foreign countries where you don’t have a legal entity
Very early stages, where you want to test a market with just one or two people
Companies that want almost zero admin in a given location

Inside the US, smaller companies often use payroll software or a PEO instead of an EOR, unless they have special legal or structural reasons.

Cost and Control Comparison

In general:

Payroll software
- Lowest cost per employee
- Highest control and responsibility
PEO
- Medium cost
- Shared control; you still own the relationship, but they handle a lot of admin
EOR
- Highest cost per employee
- Lowest admin for you, but also less direct control over the legal side of the employment relationship

Think about:

How quickly your team is growing across states
How much risk and admin you’re comfortable owning
Whether you need help with HR and benefits, not just payroll

Remote Payroll Checklist

You can use this as a pre‑hire and post‑hire checklist whenever you add or move a remote employee.

✔ Register in the employee’s state

Confirm that their work location creates a tax presence
Register with the state’s tax and labor agencies before the first paycheck

✔ Set up state withholding

Get a state withholding account
Add the correct state to their payroll profile
Collect any state forms (for example, nonresident forms for reciprocity)

✔ Confirm SUI registration

Open a state unemployment account where the employee works
For multi‑state workers, decide which state gets their unemployment wages using the official test order

✔ Verify wage law compliance

Check minimum wage (state + local) for their location
Confirm overtime rules, especially in daily overtime states like CA, AK, CO, NV

✔ Check local tax requirements

Look for city, county, or school district taxes
Add local tax codes in your payroll system if needed

✔ Review leave laws

Confirm whether that state or city has paid sick leave
Check if a statewide paid family and medical leave program applies
Turn on the right payroll deductions and benefits

✔ Update your handbook

Add or update a state‑specific addendum that covers wage, overtime, and leave rights
Share it with the employee and keep a record

✔ Prepare multi‑state year‑end forms

Track moves and multi‑state work throughout the year
Review W‑2s and state reconciliations for employees with more than one state on file

FAQs

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

In most cases, yes, if they are working there regularly.

If an employee lives and works in a state, that state usually expects you to:

Register for withholding and unemployment
Follow its wage, overtime, and leave laws
File regular payroll tax returns

Occasional travel by your staff into another state is different from having a remote worker based there. For “work from anywhere” policies, you must clearly define which states employees are allowed to work in, so you don’t accidentally create obligations in dozens of places.

2. What if an employee temporarily works from another state?

It depends on:

How long they stay
How much work they do from there
The rules of both states involved

Many states look at regular, ongoing work from a state as the trigger for registration and withholding. Short trips (like a week‑long conference) usually don’t trigger new obligations on their own, but month‑long stays or repeated work periods might.

For longer “temporary” moves, it’s safer to:

Confirm state guidance
Consider registering if they’ll work there for a meaningful stretch
Update your internal policy so employees must ask approval before long out‑of‑state stays

3. Can payroll software handle remote employees automatically?

Payroll software can:

Calculate taxes for multiple states and many localities
Track different rules by location
Generate W‑2s with multiple states
Apply updated rates and thresholds each year

But it cannot automatically:

Decide where you have to register
Know when an employee secretly moves
Decide whether someone is a contractor or an employee

You have to:

Keep work locations accurate
Turn on new states in the system after you register
Update profiles as soon as employees move

4. What happens if I don’t comply?

If you ignore these rules, you risk:

Back taxes and penalties from states (for withholding, unemployment, local taxes)
Interest on late payments
Wage claims for underpaid overtime or missed final pay deadlines
Denied unemployment or leave benefits for employees, which can trigger complaints
Problems in investor or buyer due diligence, when someone reviews your state registrations and payroll practices

Cleaning this up later almost always costs more—in cash, time, and trust—than doing it right up front.

Final Thoughts

Remote hiring lets you tap into great talent anywhere. The catch is that every new state you hire in is like adding a small new country to your payroll map.

If you:

Register early in each new state
Withhold tax where employees actually work
Respect local wage, overtime, and leave laws
Use tools that support multi‑state compliance
Get advice when you’re unsure (moves, convenience‑rule states, big expansions)

…you can run payroll for a fully remote, multi‑state team without living in fear of audits.

Over time, proactive compliance actually saves you money:

You avoid penalties and rushed clean‑up projects
You sail through funding and acquisition reviews
You keep employees happy because their pay and taxes “just work”

As your team spreads out, it may be time to:

Upgrade from basic payroll to a multi‑state capable platform
Add a PEO or trusted advisor if you don’t want to own all the complexity
Set clear remote‑work location rules so you only expand into states you’re ready to handle

You don’t have to become a tax expert. But if you understand the main moving parts in this guide, you’ll ask better questions, set up your systems the right way, and run a remote payroll you can trust.