Work from home has become much more common in the last several years, especially as companies adjusted after the COVID-19 pandemic. Employees looked for more flexibility and businesses found they could hire and retain talent without requiring everyone to be in the office every day. While remote work can be convenient for both the company and the employee, it can also make payroll taxes more complicated. For Example, when an employee works from home in another state, the company will need to look at where the employee is physically doing the work—not just where the company office is located. That can and will affect the taxes withheld from the employee’s paycheck and will require the company to set up payroll tax accounts in that state.

What This Means

• Withholding may belong to the employee’s work state: If an employee lives and works in a state different from the company’s office, the company may need to withhold income taxes for the state where the employee is working. If states have reciprocity agreements like New Jersey and Pennsylvania the income tax can go to the home state however the unemployment taxes will need to go to the state physically worked in.  States that do not have reciprocity agreements, income taxes will need to be withheld in both states.
• The company will need to register there: Before the company can withhold and remit taxes, it will need to open payroll tax accounts with that state.
• Unemployment taxes will be affected: Remote work will change where the company owes unemployment insurance taxes. Unemployment taxes go to the state where the employee is physically working.
• Local payroll taxes may also apply: Some cities, counties, or municipalities have their own payroll tax rules. If the employee works in one of those locations, there may be additional filing or payment requirements.
• Reciprocity agreements can change the answer: Some neighboring states, as noted above, have agreements that allow employees to pay income tax only to their state of residence, even if they work across state lines.
• Remote-work rules are not the same everywhere: A few states may still treat the employee as working in the employer’s state under certain circumstances, which can make withholding more complicated.
• A single remote employee can create broader tax exposure: Having an employee in a new state may create obligations beyond payroll, including other state business tax filings.
• Other state programs may come into play: Depending on the state, the company may also need to address paid family leave, disability insurance, workers’ compensation, or similar programs.

Simple Steps for the Company

1. Confirm the physical work location for each remote employee.
2. Require employees to notify the company before moving or working from another state.
3. Determine whether the company needs to register for payroll taxes in that state.
4. Confirm the correct state and local taxes to withhold from the employee’s paycheck.
5. Review whether unemployment insurance, workers’ compensation, paid leave, or disability requirements apply.
6. Keep clear records of where the employee worked and when any location changes occurred.
7. Involve payroll, HR, finance, legal, and tax advisors before approving remote work in a new state.

Bottom Line

The key takeaway is that remote work will create payroll tax obligations in the state where the employee is working. That may mean registering with the state, changing the taxes withheld from the employee’s paycheck, paying unemployment taxes, and complying with other state-required programs. Before approving remote work in a new state, the company should review the employee’s work location and confirm the related payroll and tax requirements.