Navigating Multistate Tax Filing: Tips for Remote Teams

Remote work is no longer a trend; it’s the new normal. As U.S. businesses expand their hiring across state lines, many are encountering a complex web of multistate tax obligations they didn’t anticipate.

When your workforce operates from multiple states, it can create a nexus in each of those locations, triggering a wide range of tax responsibilities, including income tax withholding, payroll registration, unemployment insurance, and even sales tax implications. The regulatory landscape varies dramatically from state to state, and the IRS isn’t the only authority keeping watch.

This article is your comprehensive guide to navigating multistate tax filing with confidence. Whether you manage a startup with a distributed team or a growing SMB with hybrid operations, the tips below will help you stay compliant, minimize risk, and build a scalable tax strategy for your remote workforce.

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What Is Multistate Tax Filing?

Multistate tax filing refers to the process of filing tax returns and complying with tax laws in more than one state. When your company has employees, contractors, sales activity, or other operations in multiple states, you may be required to:

• Register as an employer in each relevant state
• Withhold and remit state income taxes based on employee location
• Pay state unemployment insurance (SUI) to the appropriate authority
• File business income tax or franchise tax returns
• Collect and remit sales tax (if you have economic or physical nexus)

Each state has its own rules for determining tax obligations, which makes compliance for remote teams especially challenging.

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How Remote Work Triggers Tax Obligations

Employee Location Creates Nexus

When an employee works remotely in a state where your company has no other presence, that alone can trigger nexus—a legal connection that establishes a tax obligation. This can include:

• Income Tax Nexus: You may need to withhold state income tax for the employee’s state.
• Payroll Nexus: You may be required to register for and remit state payroll taxes.
• Business Income Nexus: Some states consider remote employees as creating sufficient presence for business income tax filings.

Independent Contractors vs. Employees

Engaging remote contractors in other states may not create payroll tax obligations, but it can still trigger business registration or information return filing requirements. Some states have begun tightening enforcement even for non-employee workers.

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Multistate Tax Challenges Businesses Face

1. Knowing Where to Register
   Many business owners are unaware that hiring a remote employee in another state typically requires registering for payroll taxes and withholding in that state.
2. Tracking Changing Regulations
   State laws around remote work and tax nexus are still evolving. What applied in 2024 may not hold in 2025.
3. Dual Taxation Risk
   Without proper apportionment and coordination, businesses can be taxed twice on the same income—once in the company’s home state and again where the employee resides.
4. Complex Payroll Calculations
   Each state has its own tax rates, thresholds, unemployment rules, and filing schedules.
5. Risk of Penalties
   Failure to comply with registration or withholding rules can result in late fees, interest, and audits.

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Step-by-Step: How to Manage Multistate Tax Filing

1. Identify Where You Have Nexus

Start by building a map of where your employees, contractors, customers, and physical or economic activities occur. Nexus can be created by:

• An employee working from home
• A warehouse or rented office space
• Consistent sales over a certain dollar threshold
• Affiliate or marketing relationships

Each state defines nexus differently, so review the criteria carefully.

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2. Register With the State

Once you determine that a nexus exists, register your business with the relevant agencies in that state:

• State Department of Revenue – for income tax withholding and sales tax
• State Labor Department – for unemployment insurance and wage reporting
• Secretary of State – if foreign entity registration is required

Failing to register can trigger noncompliance notices, back taxes, and fines.

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3. Set Up Payroll Withholding by State

Each employee must have the correct state income tax withheld based on their primary work location, which is typically their home for remote workers.

Ensure your payroll provider:

• Supports multistate tax withholding
• Calculates the correct deductions for each employee’s location
• Files the appropriate state returns (monthly, quarterly, or annually)

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4. Monitor State Unemployment Insurance (SUI) Rules

Some states require separate unemployment contributions even for one remote employee. SUI tax rates vary by industry, claim history, and location.

Tip: In most cases, only one state is entitled to SUI for a remote employee, typically the state where the employee works.

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5. Track and Apportion Business Income

If your business earns revenue across multiple states and has nexus in each, you must apportion income correctly across those states. This usually involves formulas based on:

• Sales by state
• Payroll by state
• Property or operations by state

A miscalculation can lead to overpayment or underpayment of taxes.

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6. Automate Reporting and Filing

To manage multiple jurisdictions, your business should leverage:

• Payroll software with multistate capabilities
• Nexus tracking tools that monitor employee movement or sales thresholds
• Tax calendars to manage deadlines for each state
• Centralized documentation of registration, filings, and payments

Avoiding penalties requires consistency and timely submissions.

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7. Review Tax Treaties and Credits

Some states offer reciprocity agreements, allowing residents who work in neighboring states to avoid dual taxation. For example, an employee living in New Jersey but working in Pennsylvania may only pay taxes to one state, not both.

Work with a tax advisor to:

• Claim tax credits for income taxed in another state
• Avoid filing unnecessary returns
• Structure payroll properly under reciprocity rules

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Best Practices for Managing Remote Tax Compliance

• Create a Remote Work Policy: Document expectations, tax implications, and reporting responsibilities for employees.
• Conduct a Quarterly Nexus Review: As your team grows or moves, reassess where you have obligations.
• Centralized HR and Finance Communication: Keep all departments informed about hiring in new states or changing employee locations.
• Engage a Multistate Tax Advisor: For complex or growing teams, expert guidance is essential to avoid missed filings or overpayment.
• Keep Employee Locations Up to Date: Encourage employees to report address changes immediately—tax rules are location-dependent.

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Common Mistakes to Avoid

• Assuming remote workers don’t create tax obligations
  One employee in another state can trigger nexus and filings.
• Delaying registration until tax season
  Most states require registration before hiring or paying remote workers.
• Relying solely on payroll software without review
  Software is only as good as the data entered. Always audit settings and assumptions.
• Ignoring state-level business taxes
  Franchise taxes, gross receipts taxes, and business license fees may still apply even if you’re not physically present.

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Conclusion

As remote work continues to redefine the way businesses operate, multistate tax compliance becomes a critical part of financial management. By understanding how remote employees trigger tax obligations and putting systems in place to manage registration, withholding, and filing, your business can scale across state lines with confidence.

At Finalert, we help businesses build strong compliance strategies that support remote growth, reduce risk, and simplify complex filings. If you’re navigating multistate operations in 2025, you don’t have to do it alone. Structure, software, and smart planning can keep you ahead of every jurisdiction.