Hiring one person who works from home in another state is usually enough to create remote employee tax nexus for your business, meaning that state can require you to register with its revenue department, its labor agency, and often its Secretary of State before the employee’s first paycheck. The threshold is genuinely that low. You don’t need an office, inventory, or customers in the state. A person doing regular work for you from within its borders is the connection, and it starts on day one.
Why One Worker Is Enough
Nexus is the legal connection between your business and a state government that gives that state authority to tax you. For income and employment taxes, the traditional test is physical presence, and a remote employee living and working in a state satisfies it. Their home office, their computer, and their regular activity on your behalf all count as your business operating within that state.
This is sometimes called the one-employee rule. There is no minimum sales figure, no lease requirement, no warehouse trigger. One person doing regular work for you is enough to pull you into payroll tax withholding, unemployment insurance contributions, and often corporate income or franchise tax filings. Some states will also assert sales tax nexus over your business once an employee is present there, which matters if you sell taxable goods or services into that market.
The Federal Shield Is Narrower Than It Sounds
Federal law offers one protection, and it is worth understanding mostly so you don’t overestimate it. Under 15 U.S.C. ยง 381, a state cannot impose a net income tax on your business if your only activity in that state is soliciting orders for sales of tangible personal property, where the orders are sent out of state for approval and filled from outside the state.1Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax
Two limits matter. First, the statute covers tangible personal property only. If you sell software, consulting, cloud services, advertising, or anything else that isn’t a physical product, the shield doesn’t apply at all. Second, the protection covers order solicitation and nothing more. A remote employee doing customer support, writing code, managing accounts, or handling administrative work falls outside the shield even for a company that ships physical goods.
The Multistate Tax Commission has further narrowed the practical scope by treating many routine digital activities as exceeding solicitation. Under that guidance, providing post-sale support through live chat, accepting online credit card applications, and placing tracking cookies on customer devices all defeat the shield.2Multistate Tax Commission. Statement on PL 86-272 A growing number of states follow this interpretation. For most companies with substantive remote work, the statute offers no practical help.
When Two States Both Want Withholding
A handful of states apply a convenience of the employer rule. If an employee works remotely for their own convenience rather than because your business requires it, the employer’s home state can still tax that income as if the employee were working in-state.
Roughly seven or eight states enforce some version of this rule, and the specifics vary. Some apply it broadly to nonresidents working for in-state employers; others limit it to workers whose home states have similar rules or to particular job categories.3Connecticut General Assembly. Convenience of the Employer Rule The practical result is that a remote worker may owe income tax in both your state and their state, and you may need to withhold for one, the other, or both.
Reciprocal agreements sometimes cut through the mess. About 16 states and the District of Columbia participate in roughly 30 bilateral agreements under which the employee owes income tax only to their home state and you withhold only for the home state.4National Finance Center (USDA). Certificate of Non-Residence for State Tax These agreements exist between specific pairs of states, so a state may have one with some neighbors but not others. To use reciprocity, the employee generally has to file a certificate of non-residence with you. Until that form is on file, you withhold for the work state as if no agreement existed.
Reciprocity covers income tax withholding only. It does not eliminate your obligation to register for unemployment insurance, workers’ compensation, or corporate income tax in the employee’s state.
What You Actually Have to Register For
“Registration” is a mild word for what happens. One remote employee in a new state can generate four or five separate registrations across different agencies, each with its own forms, account numbers, and filing schedules.
Secretary of State: Foreign Qualification
If your business is an LLC, corporation, or other formal entity, most states require you to register as a foreign entity before conducting business there. Foreign in this context just means formed in another state. The process, called foreign qualification, involves filing an application for a certificate of authority. Initial filing fees range from roughly $50 to $750 depending on the state, and most states also require annual or biennial reports.
Foreign qualification requires you to designate a registered agent in the state, a person or service authorized to receive legal documents and official notices on your behalf. If someone sues your company there, the registered agent is who gets served. Losing that designation can lead the state to revoke your authority to do business, and in worst-case scenarios you may not learn about a lawsuit until a default judgment has already been entered.
Department of Revenue: Income Tax Withholding
The state revenue department handles employer income tax withholding registration. Nine states impose no personal income tax on wages, so an employee living in one of those states won’t create a state income tax withholding obligation there, though other registrations still apply. Elsewhere, you’ll open a withholding account, receive a state tax identification number, and begin withholding under that state’s rates and rules.
Some states also require you to register for corporate income or franchise tax if the employee’s presence creates nexus for business-level taxes. That is a separate registration from the payroll account, with its own forms and schedules.
Department of Labor: Unemployment Insurance
Every state runs its own unemployment insurance program, and you must register as an employer and pay into the fund for each state where you have employees. New employer rates typically range from about 1% to 4% of wages, though a few states assign higher starting rates. Those rates apply to a taxable wage base that varies enormously, from $7,000 in some states to over $60,000 in others.5Tax Policy Center. State Unemployment Insurance Tax Rates Your rate adjusts over time based on your claims history, and experienced-employer rates run from near zero to over 10% in some states.
Workers’ Compensation and Other Mandatory Insurance
Almost every state requires employers to carry workers’ compensation insurance covering employees who work within its borders, and coverage is generally based on where the employee works, not where you are headquartered. If a remote employee is injured while working from a home office, that state’s workers’ compensation law governs the claim. You may need a separate policy or an endorsement adding the new state to an existing one. Failure to carry required coverage can bring daily fines in the hundreds or thousands of dollars, plus personal liability for workplace injuries.
A few states also mandate employer-funded disability insurance or paid family leave programs, with separate registration and contribution requirements. Check the specific obligations where the employee lives before the first paycheck.
Local and Municipal Taxes
Several states authorize cities and counties to impose their own income or payroll taxes. A remote employee in one of those municipalities can trigger local registration obligations too, and in some areas both the employee and the employer owe separate local taxes. The states granting broad local taxing authority tend to cluster in the Midwest and Mid-Atlantic. Neighboring cities in the same state can have completely different rules, so if your employee lives in a state that permits local income taxes, check the specific city and county.
What to Gather Before You Start
Most state portals won’t let you save a partially completed application, so pull these together first:
- Federal Employer Identification Number (EIN). Every state registration requires it.
- Formation documents such as articles of incorporation, articles of organization, or an operating agreement. Some states also require a certificate of good standing from your home state.
- Registered agent name and physical address in the new state.
- The employee’s exact start date in the state, which determines when your tax liability begins.
- Estimated quarterly payroll, used to set your initial payment schedule and deposit frequency.
- Your six-digit NAICS code, which the labor department uses to assign your unemployment insurance rate based on industry claim history.6U.S. Census Bureau. Business Enterprise Research and Development Survey – Business Codes
- Employee residential address and Social Security number to link the payroll account to the worker.
Most states now handle registration through online portals with digital signatures and electronic payment. A few still offer paper. After submission you’ll receive a state tax ID and an unemployment insurance account number, sometimes within minutes for automated systems, or within a few weeks where applications are reviewed manually.
What Non-Compliance Costs
Ignoring nexus obligations compounds quickly. At the federal level, failing to deposit withheld employment taxes triggers escalating penalties that top out at 15% once you have received a delinquency notice from the IRS, applied to the amount you should have deposited and stacked on top of the underlying tax you still owe.7Office of the Law Revision Counsel. 26 USC 6656 – Failure to Make Deposit of Taxes
State penalties vary. Most states charge a percentage-based late payment penalty on unpaid withholding plus interest that accrues monthly, and some add flat per-occurrence penalties for missed returns. The longer you go without registering, the larger the back-tax assessment grows, because the state will eventually calculate what you should have withheld from the employee’s first paycheck forward.
Tax penalties aren’t the only exposure. Operating without required workers’ compensation insurance carries its own fines. Doing business without foreign qualification can cost you the right to sue in that state’s courts, which matters if a customer or vendor there ever owes you money. Some states also impose daily fines for operating without proper registration, and the accumulated bill over months or years of non-compliance can dwarf the underlying taxes.
The cheapest path is the dullest one. Register before the first paycheck, set up withholding correctly from day one, and file quarterly returns on time. Compliance costs are modest and predictable. Penalty costs are neither.