I Have Employees Who Live and Work in a Different State. Do I Need Tax Accounts in That State?

Almost certainly yes. Here’s exactly what that means, why it matters, and what happens if you get it wrong. Remote work changed a lot of things for business owners. One of the things it changed that nobody warned you about? Your payroll tax obligations.

The moment one of your employees lives and works in a state other than the one your business is registered in, you’ve crossed a threshold that most employers don’t realize has tax consequences. You now have what’s called nexus in that state — a legal presence that triggers a whole set of registration and withholding requirements.

This is one of the most common questions we get at APlus. And it’s one where getting the answer wrong can cost you significantly. Let’s walk through it.

 

The Short Answer: Yes, You Almost Certainly Do.

When an employee lives and performs their work in another state, that state considers you to be doing business there. That means you’re generally required to:

  • Register with that state’s Department of Revenue to withhold and remit state income tax.
  • Register with that state’s Department of Labor for State Unemployment Insurance (SUI/SUTA).
  • Comply with that state’s payroll filing requirements, including deposit schedules, quarterly reports, and annual reconciliations.
  • Follow that state’s wage and hour laws, which may differ from your home state on minimum wage, overtime, pay frequency, and final paycheck rules.

Payroll taxes follow the employee — not the employer. The state where your employee performs their work is the state that gets to tax their wages and require your compliance. Where your business is headquartered is largely irrelevant to that equation.

 

What ‘Nexus’ Actually Means for Your Payroll.

Nexus is a legal term that means you have enough of a connection to a state that it has the right to require you to comply with its tax laws. For payroll purposes, having even one employee working in a state is almost always enough to establish a nexus there.

It doesn’t matter if:

  • Your business has no physical office in that state
  • The employee only works there part of the year
  • The employee works from home and never visits a company facility
  • You’ve never registered or filed anything in that state before

If the work is being performed there, the obligation exists. The state doesn’t wait for you to discover this — and they don’t typically send a friendly reminder when you’ve been missing filings.

The cost of non-compliance: States take unregistered employers seriously. Penalties for failing to withhold and remit state income tax can include back taxes owed on every affected paycheck, plus interest and penalties that compound over time. Some states also assess penalties for late registration alone, separate from any unpaid tax liability. The longer it goes unaddressed, the more expensive it becomes.

 

The Two Accounts You Typically Need to Open.

For most states, you’ll need to establish two separate registrations before you can legally run payroll for an employee there.

  1. State Income Tax Withholding Account

This account is opened with the state’s Department of Revenue. Once registered, you’ll receive a withholding account number that goes on your payroll filings. This account allows you to withhold state income tax from your employee’s wages and remit those funds to the state on the required schedule — which varies by state and by how much you’re withholding each period.

  1. State Unemployment Insurance (SUI) Account

This account is opened with the state’s workforce or labor agency. State unemployment insurance is an employer-paid tax — it doesn’t come out of your employee’s paycheck. Your rate is assigned based on your industry and claims history in that state. New employers typically receive a new employer SUI rate when they first register, which is later adjusted based on unemployment claims filed against your account.

Worth knowing: SUI rates for new employers can range from under 1% to over 4% depending on the state — and some states have industry-specific new employer rates. It’s worth knowing what rate you’ll be assigned before you hire in a new state, as it affects your overall labor cost.

 

Wait — What About Reciprocal Agreements?

Here’s where it gets a little more nuanced. Some states have reciprocal tax agreements with neighboring states, which allow employees who live in one state but work in another to pay income tax only in their state of residence.

For example, if your business is in Maryland and you have an employee who lives in Virginia and commutes to your office, you may be able to withhold Virginia income tax instead of Maryland income tax, because Maryland and Virginia have a reciprocal agreement.

This can simplify things for the employee — but it doesn’t eliminate your registration requirements. You still typically need to be registered in the employee’s home state to withhold correctly.

States with broad reciprocal agreement networks include Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin — though the specific agreements between any two states vary. Always verify the current status for your specific state combination.

Important caveat: reciprocal agreements cover state income tax withholding only. They do not apply to state unemployment insurance. You will still need a SUI account in the state where the work is performed, regardless of any reciprocal agreement.

 

What If the Employee Travels Between States for Work?

The general rule is that income tax is owed to each state based on the proportion of work performed there. If your employee works 60% of the time in State A and 40% in State B, their wages are typically allocated accordingly for tax purposes.

Managing this correctly requires tracking work location by pay period, understanding each state’s allocation rules, and potentially filing in multiple states on the employee’s behalf. It’s one of the more complex payroll situations you can find yourself in.

The work-from-home wrinkle: Some states have what’s called a “convenience of the employer” rule — meaning if an employee works from home in another state for their own convenience rather than a business necessity, the employer’s home state may still claim the right to tax those wages. New York is the most well-known example. If you have employees working remotely in or from certain states, the rules can be surprisingly employer-unfavorable.

 

What to Do When You Hire Across State Lines.

Here’s the practical sequence for getting compliant when you bring on an employee in a new state:

  1. Identify the employee’s work state. This is the state where they will physically perform their work — not where your business is located.
  2. Check for reciprocal agreements. Determine if the employee’s work state and residence state have a reciprocal agreement that affects where income tax is withheld.
  3. Register for a withholding account. Apply with the state’s Department of Revenue. Processing times vary — some are immediate, others take two to four weeks.
  4. Register for a SUI account. Apply with the state’s workforce or labor agency. You’ll receive a new employer rate assignment.
  5. Update your payroll system. Once you have your account numbers, your payroll configuration needs to be updated to withhold and remit correctly. In UKG Ready, this is a setup task we handle for APlus clients.
  6. Review that state’s wage and hour rules. Minimum wage, overtime thresholds, required pay frequency, and final paycheck timing may all differ from your home state.

APlus handles the setup for you. For APlus Payroll clients, multi-state registration and payroll configuration is something we walk you through — or handle entirely on your behalf. Once you have your account numbers from each state, we update your UKG Ready configuration so the right taxes are withheld and remitted correctly from the first paycheck. You don’t need to become a multi-state tax expert. That’s what we’re here for.

 

The Three Most Common Mistakes We See.

  1. Waiting until tax season to address it. Multi-state obligations begin the moment an employee starts working in a new state — not at year end. By the time W-2s are due, you may have a full year of unfiled returns and unremitted taxes behind you.
  2. Assuming your payroll provider handles it automatically. Some platforms will flag a new state on your employee setup — but they cannot register you with state agencies on your behalf. Registration is the employer’s legal responsibility. Your payroll system can only withhold and remit correctly once you have valid account numbers to give it.
  3. Confusing the employee’s home address with their work state. If your employee lives in State A but their role requires them to work primarily in State B, their payroll tax state is determined by where the work happens — not where they sleep. Remote employees who work from home are an exception: their home state is generally their work state.

 

Multi-state payroll is one of those areas where the rules are clear but the implementation is easy to get wrong — especially if you’re managing it yourself or relying on a platform that doesn’t proactively flag what you’re missing.  If you have employees working in states where you’re not yet registered, the right time to address it is now. Not at year end. Not when a state notice arrives.

If you’re unsure whether you have multi-state obligations — or you know you do and aren’t sure where to start — contact us. Our tax expert Kevin can walk through your specific situation and tell you exactly what needs to happen.

This blog does not constitute formal Payroll, HR or legal advice. Our HR Resource Center by Mineral offers further guidelines for this and many other topics. For a small additional fee you can also speak to a live HR Specialist. Contact your friendly APlus Payroll CSS for further information (including login details) or login here.