Remote Work and State Taxes: What You Need to Know
"In 22 states, the answer is technically yes" — should you have to file a tax return in a state where you babysat for one hour?
Source: Tax Foundation
As remote work continues to blur the lines between office and home, business owners are increasingly facing a new tax challenge: figuring out where their employees’ income is taxable. This isn’t just a question of convenience — it’s a compliance imperative. And it’s one that many small business owners overlook, often to their surprise and cost.
Let me take you back to a client I worked with in 2022. She ran a marketing agency and had an employee in Colorado who worked remotely for a company based in New York. The employee never physically set foot in New York, but because the company had an office there, the state considered them to have a nexus. The result? The company had to withhold and pay income taxes in New York — and failed to do so, which led to an audit and unexpected penalties.
This is not an isolated story. With remote work becoming the norm, the tax implications are no longer limited to the state where an employee lives. Instead, it’s about where the business operates, where the client is located, and in some cases, even where the work is performed.
Here’s what you need to understand:
- Nexus matters: If your business has a physical presence, office, or even a long-term employee in a state, you may have to register there and file taxes.
- Reciprocity agreements vary: Some states have agreements to avoid double taxation, but others don’t. For example, if your employee works in one state but resides in another, you must understand the rules — or risk filing in the wrong place.
- Remote work = taxable presence: In 22 states, even a brief physical presence — like a one-day training session — can create a tax obligation. Think about what this could mean for contract workers or gig employees who pop in and out of states for client meetings.
And let’s not forget about payroll and workers’ compensation. If your employee is considered to be working in a state with different rules, you might be required to register for payroll withholding and workers’ comp in that state. This is especially true in states with strict “convenience of the employer” rules, where an employee working remotely for their convenience is still treated as working in the state where their office is located.
So, how can you stay ahead? First, keep a close eye on your employees’ work locations. Second, build a system — whether it’s a checklist, a tax compliance partner, or a software tool — to track where your work is being done and what it means for your tax obligations. Third, don’t wait for an audit to learn about your responsibilities.
Remote work is here to stay. But with it comes a new level of complexity — and a need for clarity, not confusion. The stakes are high, and the rules are evolving. The best strategy is to be proactive, informed, and ready.
