Hiring Remote Employees in Another State and What US Employers Must Do

Hiring a remote employee in another state usually means registering your business with that state, opening payroll tax withholding and unemployment insurance accounts there, obtaining workers compensation coverage valid in that state, and complying with that state's labor laws for that employee. The employee's work location, not your headquarters, drives almost all of it. Plan four to six weeks for registration in a new state, and confirm the specifics with a payroll provider or employment counsel before the first paycheck.

This is the part of remote hiring that catches growing companies out. The recruiting is the easy half. The compliance half is administrative rather than difficult, but it has a fixed cost per state and it does not forgive being skipped.

The core principle is that the law follows the employee

For employment purposes, a remote worker is generally treated as working where they physically sit, not where the company is incorporated or where their manager lives. That single rule drives most of what follows. Hire someone in Oregon and you are, for practical purposes, an employer operating in Oregon.

The consequence is that each new state adds a set of obligations rather than replacing your existing ones. Two employees in two states means two payroll tax registrations, two unemployment insurance accounts and two sets of leave rules running in parallel. This is why many companies limit remote hiring to a defined list of approved states, and why that list belongs in your job posting. The posting itself already carries an obligation in fifteen jurisdictions, before you have hired anyone: see pay transparency laws by state for which of them reach a remote listing and what a non-compliant one costs.

Step one is business registration and nexus

Most states take the position that having an employee in the state creates nexus, meaning a taxable connection, which typically requires registering to do business there as a foreign entity with the Secretary of State. That registration usually carries a filing fee, an annual report, and often a registered agent you have to pay for.

Nexus can also extend beyond payroll. Depending on the state and what the employee does, an in-state employee can create state income tax or franchise tax obligations for the business itself, and in some cases sales tax collection duties. The rules vary considerably and this is the piece worth asking your CPA about specifically rather than guessing, because the cost of being wrong compounds quietly across years.

California shows how low that bar can sit. Its Franchise Tax Board treats a business as doing business in the state when California payroll exceeds $75,707 for 2025 or 25 percent of total payroll, and either test is enough to require a California return and the $800 annual minimum tax for a corporation or LLC. The percentage test is the one that catches small employers: a California hire crosses it whenever their salary is more than a third of everything else you pay, so a company with $150,000 of payroll elsewhere is doing business in California once the remote employee there earns over $50,000. The full list of duties one California hire switches on, with a checker for your own numbers, is on our page for out-of-state employers with remote employees in California.

Step two is payroll tax withholding

Register with the new state's tax or revenue department for income tax withholding, then withhold based on where the employee works. Nine states have no personal income tax at all, which simplifies this considerably: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Two complications come up often. The first is reciprocity: neighboring states sometimes have agreements letting an employee pay tax only in their home state, which matters most for people who live near a border. The second is local tax. Cities and counties in states including Ohio, Pennsylvania, Kentucky, Michigan and Missouri levy their own income taxes, and those are administered locally rather than by the state, so they are easy to miss entirely.

There is also a narrower rule worth knowing if your company is based in New York, and in varying forms Delaware, Nebraska, Pennsylvania and Arkansas: the convenience of the employer test. Broadly, if an employee works remotely for their own convenience rather than because the employer requires it, those states may still treat the wages as sourced to the employer's state, which can produce a genuine double-tax exposure for the employee. If your company is in one of them, get advice before the first payroll rather than after. The employee-side view of this same rule, which is worth understanding before you set expectations in an offer, is in our piece on whether you can work a remote job from any state.

Step three is unemployment insurance

State unemployment insurance is separate from income tax withholding and needs its own account, in the state where the employee works. Rates vary by state and by your own claims history, and new employers are assigned a starting rate that is typically somewhere in the low single digits as a percentage of wages up to a state-set wage base.

Federal unemployment tax, FUTA, sits on top at 6 percent of the first $7,000 of each employee's wages, though employers who pay state unemployment on time generally receive a credit that brings the effective federal rate down to 0.6 percent. Missing a state registration can jeopardize that credit, which is one of the quieter costs of getting this wrong. The credit is also reduced in states that owe the federal unemployment trust fund: for 2025 wages California was the only state with a reduction, 1.2 points, so an employee working there costs 1.8 percent, $126 rather than $42.

Which state gets the tax is not decided the same way as income tax withholding, and this is where multi-state payroll surprises people. Unemployment insurance follows a four-step hierarchy that every state has adopted in near-identical language, set out in US Department of Labor Unemployment Insurance Program Letter 20-04. You apply the steps in order and stop at the first that answers: is the service localized in one state, then is the employee's base of operations in a state where some service is performed, then which state is the work directed and controlled from, then finally the employee's state of residence. The program letter carries an example that reads as though it were written for remote work, in which a New York employee moves to Florida, telecommutes with all work products travelling over the internet, and her services are held to be localized in Florida and subject to Florida law.

Two consequences matter. An employee's wages are never split between states for unemployment purposes, all of them go to exactly one state, whereas income tax withholding can be apportioned day by day. And because the two tests are unrelated, they can point at different states, which is exactly what happens when a convenience of the employer rule is in play. The full mechanics, including the six convenience states and the reciprocity agreements that cancel double withholding, are on our page covering state tax withholding for remote employees.

Step four is workers compensation

Workers compensation is state-regulated and your existing policy may not extend to a new state automatically. Some states are covered by standard commercial policies with an endorsement; a handful, including Ohio, North Dakota, Washington and Wyoming, run monopolistic state funds where coverage must be purchased from the state itself.

Remote workers are covered by workers compensation. A home office injury during work hours can be a compensable claim, which surprises employers who assume the exposure disappeared with the office. Counting the jurisdictions, 36 of 51 attach the duty to the first employee, 13 set a headcount threshold of three, four or five counted across the whole business rather than per state, and Texas is the only state where a private employer can decline outright. So the default is that the first hire creates the duty, and the exceptions are worth knowing by name rather than assuming.

The failure that actually shows up here is the "other states" endorsement. The information page of your policy has an Item 3A listing states with full statutory coverage and an Item 3C listing other states, and 3C is much narrower than the name suggests. New York's Workers' Compensation Board limits it to employees attending meetings, seminars, conferences or conventions in the state no more than once a month, or travelling through without stopping for work. An employee with a permanent home office in the state is none of those, so the state belongs in 3A. The full state-by-state position, with the coverage trigger, who is allowed to write the policy and what each state charges per $100 of payroll, is on our workers comp for remote employees page.

Step five covers the labor laws that come with the state

This is the category that is easiest to overlook because nothing prompts you to do it. The employee's state generally sets the floor for:

Which of those rules bind you, and which stay behind at head office, is set out area by area in which state laws apply to remote employees.

• Minimum wage and overtime. State thresholds for exempt status can be significantly higher than the federal one, notably in California, New York, Washington and Colorado, so a role classified exempt at your headquarters may not be exempt for that employee.
• Paid sick leave. Required in a growing number of states and some cities, with accrual rules that differ in the details.
• Business expense reimbursement. California, Illinois and Montana all require an employer to reimburse necessary business expenses, which for a remote employee reaches the home office and the internet line. See work from home stipend and reimbursement rules by state.
• Paid family and medical leave. Several states run contributory programs funded by payroll deductions, which means another registration and another line on the pay stub.
• Final pay timing. Some states require a terminated employee's final check immediately; others allow the next regular payday. Penalties for getting this wrong are real.
• Pay transparency. Colorado, California, New York, Washington, Illinois and others require salary ranges on postings open to their residents, which effectively applies to any fully remote US role.
• Notices, handbooks and expense reimbursement. Several states require specific written notices at hire, and California and Illinois among others require reimbursement of necessary business expenses, which for a remote worker can include internet and phone.

None of these are hard individually. The difficulty is that they multiply by state and change every legislative session, which is why companies past a handful of states usually stop tracking them in a spreadsheet and move to a system that maps each obligation to a control and tells you when one changes.

The alternatives to registering everywhere

Two options exist if the administrative load is not worth it for a single hire.

An employer of record, or PEO, employs the person on your behalf in that state and handles registration, payroll, tax and compliance. You direct the work; they carry the employment relationship. It costs a monthly fee per employee or a percentage of payroll, and it is usually the right answer for one or two people in a state you do not otherwise operate in.

Hiring a contractor instead is the other option, and the one most often used incorrectly. Worker classification is determined by the substance of the relationship, not the contract, and misclassification carries back taxes, penalties and interest, plus state-level exposure that in places like California is stricter than the federal test. If you control when, where and how the work is done, and the person works for you full-time on your core business, they are almost certainly an employee regardless of what the agreement says. The practical differences from the worker's side are covered in our guide to 1099 vs W-2 remote jobs.

A practical order of operations

1. Decide which states you are willing to hire in, and publish that list in the job posting. This is by far the cheapest control you have.
2. Before extending an offer, confirm the state is on the list or budget four to six weeks and the registration cost for adding it.
3. Register with the Secretary of State, the revenue department for withholding, and the labor or workforce agency for unemployment insurance.
4. Extend or purchase workers compensation coverage valid in that state.
5. Review exempt classification, sick leave, final pay and notice requirements against that state's rules, and update the offer letter and handbook addendum.
6. Confirm local city or county taxes, which are the single most commonly missed item.

This is a summary of how the pieces fit together, not legal or tax advice. Rules change every year and the details differ enough between states that a payroll provider or employment attorney is worth the fee on the first hire in each new state.

Frequently asked questions

Do I need to register my business in every state where I have a remote employee? In most cases yes. Having an employee physically working in a state generally creates nexus, which typically requires foreign entity registration plus separate payroll withholding and unemployment insurance accounts in that state. An employer of record is the usual alternative when you do not want to register for one or two people.

Which state's taxes do I withhold for a remote employee? Generally the state where the employee physically performs the work, not where your company is based. Watch for reciprocity agreements between neighboring states, local city and county taxes, and the convenience of the employer rule that applies in New York and a few others, which can source wages back to the employer's state.

Can I just hire them as a 1099 contractor instead? Only if the relationship genuinely is a contractor relationship. Classification depends on how much control you exercise over when, where and how the work happens, not on what the contract says. Misclassification triggers back taxes, penalties and interest at both federal and state level, and several states apply a stricter test than the IRS does.

How long does it take to register in a new state? Budget four to six weeks end to end. Secretary of State registration is often fast, but withholding and unemployment insurance account numbers can take several weeks to issue, and you need them before you can run a compliant payroll. Start the process when you make the offer, not when the person starts.

Does workers compensation cover someone working from home? Yes. Injuries that occur in the course of work are generally compensable regardless of where the work happens, and coverage requirements usually apply from the first employee in a state. Check whether the state runs a monopolistic fund, since Ohio, North Dakota, Washington and Wyoming require coverage through the state rather than a private carrier.

Once the compliance side is mapped, the hiring side is the easy part. Post the role where the audience matches it on remote job posting sites, write it so it filters properly using our guide to the remote job description, and see the wider case on hire remote workers. If the role is an engineering one, the pay benchmarks and the offshore comparison are in hiring remote developers in the USA, and the timeline to expect is in average time to hire a software engineer.