Running payroll for employees in one state is hard enough. Add two, five, or even 25 states into the mix, and it quickly becomes one of the most complex challenges facing today’s growing businesses. If you’ve recently expanded your team across state lines—or plan to—you’re not alone. And if you’re feeling overwhelmed by all the payroll tax rules and compliance requirements, you’re definitely not alone either.

I’m Kim Anderson, and I’ve spent the last 14 years running a payroll outsourcing firm based here in California. My team has helped hundreds of businesses manage multi-state payroll—from tech startups with remote teams in six time zones to brick-and-mortar companies opening new retail locations in neighboring states. If you’re trying to figure out how to handle payroll tax compliance across multiple states, this guide is for you.

Let’s walk through everything you need to know—clearly, practically, and in a way that gives you confidence moving forward.

What Is Multi-State Payroll?

Multi-state payroll refers to running payroll for employees who live or work in more than one U.S. state. This includes situations like:

• A company headquartered in California with remote employees in Texas, Florida, and New York
• A warehouse team that lives in one state but works across the border in another
• Traveling employees (like sales reps or consultants) who physically work in multiple states throughout the year
• Hybrid employees who live in one state and commute to the office in another

When you have employees in multiple states, you’re responsible for complying with each state’s payroll tax rules—and that includes income tax withholding, unemployment insurance contributions, wage laws, and more.

Why Multi-State Payroll Is So Complicated

Every state has its own tax code, labor laws, and reporting requirements. Some states don’t have income tax (like Florida and Texas), while others—like California and New York—have detailed wage orders and strict compliance guidelines.

Here’s where things get tricky:

• Each state defines “nexus” (your business’s tax connection to that state) differently
• Residency rules and reciprocal agreements affect which state gets to tax the employee’s income
• You may need to register for state payroll taxes even if you only have one employee in that state
• Some states require new hire reporting, workers’ compensation coverage, or special payroll deductions

Missing even one of these requirements can lead to penalties, audits, or delays in employee payments. That’s why getting it right—early—is so important.

Step 1: Determine Where You Have Tax Obligations

Your first move is figuring out which states you need to register with. This usually includes:

• The state where your employee is physically working (even if they’re remote)
• Any state where your company has physical operations or business activity (like offices, warehouses, or job sites)
• The state where your employee resides—especially if it’s different from where they work

If your business has “nexus” in a state (meaning you have a sufficient business presence there), you’ll need to register for:

• State income tax withholding (if applicable)
• State unemployment insurance (SUI)
• Local payroll taxes, if required (some cities and counties have their own)

Tip: Even if your company is exempt from corporate income tax in a state, you may still need to withhold payroll taxes there.

Step 2: Register for State Payroll Accounts

Once you know which states apply, you’ll need to register with each state’s Department of Revenue and Department of Labor (or their equivalent). This is required before you can withhold taxes, remit payments, or file quarterly payroll returns.

Here’s what that usually involves:

• Completing an online application for a state withholding account
• Registering for state unemployment tax
• Setting up access to that state’s employer portal for wage reporting

Some states have additional layers—like disability insurance in New Jersey or paid family leave in New York and California.

Make sure you keep records of account numbers and login credentials. You’ll use these accounts frequently for filing and payment compliance.

Step 3: Understand Withholding Rules and Reciprocity Agreements

If your employee lives in one state but works in another, it gets more nuanced. Some neighboring states have reciprocity agreements, which allow employees to pay taxes only to their state of residence.

For example:

• If someone lives in Pennsylvania and works in New Jersey, they may only owe Pennsylvania income tax.
• If your business is in Illinois and you hire someone from Wisconsin, you may only need to withhold Wisconsin taxes.

These agreements save your employee from double taxation—but only if the proper paperwork is submitted. You’ll need to collect a reciprocity exemption form (specific to each state pair) and adjust your payroll system accordingly.

If there’s no agreement, you may need to withhold for both states, and your employee can file for a credit at tax time to avoid double payment.

Step 4: Track Employee Work Locations Carefully

With remote and hybrid work becoming the norm, location tracking is more important than ever. You need to know where your employees are physically performing work—not just where they live or where your company is based.

Why it matters:

• If your employee spends more than a certain number of days per year working in another state, you may owe payroll taxes there
• Some states have thresholds as low as one day of work before you’re liable
• Remote work from a vacation home or second residence can trigger unexpected tax exposure

Many businesses now use time tracking software with geolocation or require employees to report where they’re working from. This isn’t about micromanaging—it’s about protecting your business from surprise audits or tax bills.

Step 5: Stay Compliant With Filing and Payment Deadlines

Every state has its own due dates for:

• Payroll tax deposits (some require weekly or semi-weekly)
• Quarterly tax filings (usually Form 941 equivalents)
• State unemployment reports
• New hire reporting

And many states impose penalties for even minor filing delays or underpayments. That’s why I always recommend using a payroll provider—or outsourcing firm like mine—that automates reminders, handles payments, and files state reports on your behalf.

Common Questions Business Owners Ask

“Do I really need to register in a state for just one remote employee?”

Yes—if the employee performs work there, you’re generally required to withhold state income taxes and pay unemployment insurance, even for a single team member.

“What if the employee moves to another state after I hire them?”

You’ll need to update your tax registrations and potentially close the old state accounts. This is why a solid onboarding and offboarding process is critical.

“How do I handle payroll if my employee travels and works in multiple states?”

This is one of the trickiest situations. In most cases, you’ll allocate wages based on days worked in each state and withhold taxes accordingly. A professional payroll service can help track and divide earnings properly.

“Can I just pay a contractor instead to avoid all this?”

Be cautious here. Misclassifying employees as independent contractors is one of the fastest ways to get hit with penalties. If the person works under your direction and control, they’re likely an employee—and should be paid and taxed as such.

How Payroll Outsourcing Simplifies All of This

Trying to manage multi-state payroll on your own can be overwhelming. That’s where payroll outsourcing comes in. My team acts as an extension of your business, taking care of:

• Registering with each state
• Withholding and paying all taxes on time
• Filing quarterly and annual reports
• Keeping track of compliance updates
• Supporting audits and agency notices
• Ensuring your employee records are accurate and up to date

Instead of juggling spreadsheets and deadline calendars, you get peace of mind knowing it’s all handled properly—and your business stays legally protected.

Expanding across state lines is exciting—but it comes with a steep compliance curve when it comes to payroll. If you’ve got team members in multiple states, you need more than just a payroll system—you need a strategy. Whether you handle it in-house or choose to outsource, the key is staying informed, being proactive, and putting reliable processes in place. Because when you get multi-state payroll right, you protect your business, your team, and your future growth.

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Written by Kim Anderson, a Harvard University graduate with a bachelor’s degree in accounting and finance. I’m the owner of a successful payroll outsourcing firm in California and a writer for My Payroll Outsourcing. With 14 years of experience, I help businesses streamline payroll compliance, reduce administrative risk, and manage multi-state workforces with ease.