As remote work becomes the norm rather than the exception, many employers are embracing the opportunity to expand their talent pool beyond state lines. But with this flexibility comes a new set of challenges—particularly when it comes to employment taxes. Hiring remote workers in different states can trigger complex tax obligations that vary by jurisdiction, making compliance a crucial part of your hiring strategy. In this post, we’ll break down what employers need to know about the tax consequences of remote work and how to stay ahead of potential pitfalls.
State Income Tax Withholding
State Income Tax (SIT) is withheld from an employee’s paycheck and remitted to the state by their employer. While using a payroll company can simplify these logistics, it is critical to determine which state will collect the tax.
SIT is typically withheld from an employee’s paycheck based on their state of residence. For remote workers, this is usually the state where their home is located. However, if a remote employee frequently travels to and works from an office in a different state—resulting in unemployment tax obligations there—they may also be required to pay nonresident income tax to that second state.
Your company must register for a State Income Tax (SIT) ID in every state where you’re required to withhold and remit income taxes. This can become time-consuming if you’re frequently hiring employees in new states. However, some states have reciprocity agreements (e.g., New Jersey and Pennsylvania, Maryland and Virginia) allowing you to withhold taxes only for the employee’s state of residence—meaning you may only need to register in that one state.
State Unemployment Insurance
Employers are generally required to pay State Unemployment Insurance (SUI) taxes based on the state where the employee physically performs their work. In situations where the employee’s work location is unclear, there are a few alternative approaches to consider:
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Localization of service: If an employee’s work is primarily performed in one state (even if they occasionally work elsewhere), your company should pay unemployment tax to that state. For example, if the employee is based in North Carolina and only travels temporarily to other states, your company should pay SUI to North Carolina.
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Base of operations: If the employee’s work isn’t localized in one state, look at where their base of operations is—the place they start from or return to regularly. If they do some work in that state, your company should pay the tax there. For instance, if they’re dispatched from the home office in Minnesota but work across several other states, the company should pay SUI to Minnesota.
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Place of direction or control: If neither of the above applies, consider where the employee receives their instructions or supervision. If they’re managed out of an office in Illinois–even if they work elsewhere–your company should pay SUI to Illinois.
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State of residence: If none of the prior tests resolve the question, your company should pay the tax to the state where the employee lives, assuming the employee performs some work there.
Local Tax Compliance
Although less common, some states and metropolitan areas also impose local payroll taxes. Pennsylvania is well known for its Local Services Tax (LST) and Earned Income Tax (EIT), which help fund emergency services, public schools, and other community services. Your company must also ensure compliance with any city-level income taxes. Some metro areas (e.g., New York, San Francisco, Denver) impose local payroll taxes that must be accounted for.
Multi State Payroll Compliance Best Practices
If you’re planning to hire remotely, here’s a quick list of best practices:
✔ Define clear remote work policies – Specify approved remote work states and tax compliance responsibilities.
✔ Register with tax agencies in states where employees work.
✔ Use payroll software to manage multi-state payroll taxation.
✔ Monitor state law changes – Tax laws vary, and states frequently update remote work policies.
Need Help?
Navigating all the payroll tax considerations for your remote workforce can be a challenge. If you have any questions or need help setting up SIT and SUI in multiple states, call or email us today!
📞 Call us at (703) 672-1225
📧 Email us at payroll@paysteady.com