The rise of remote work has transformed how businesses operate, but it has also introduced new tax challenges—especially when it comes to state tax nexus. Many companies are unknowingly triggering tax obligations in states where they have remote employees, potentially exposing themselves to tax liabilities, penalties, and compliance burdens.

In this post, we’ll explain state tax nexus, how remote work affects tax obligations, and what businesses can do to stay compliant.

What Is State Tax Nexus?

State tax nexus refers to the connection between a business and a state that allows the state to impose tax obligations on the business. Traditionally, nexus was established through physical presence, such as an office, warehouse, or retail location. However, states have expanded their definitions to include economic presence, especially in the wake of the 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc.

Types of Nexus That May Apply to Remote Work

1. Income Tax Nexus – If an employee works remotely from a state where the business has no other presence, that state may claim the business has income tax nexus and require tax filings.
2. Sales Tax Nexus – Even if a business sells products online, having an employee working remotely in a state could create a sales tax obligation.
3. Employment Tax Nexus – Businesses must withhold state income taxes and comply with unemployment insurance requirements in states where employees physically work, regardless of company headquarters.

How Remote Work Creates Nexus Risks

• Employees Working in Different States
  
  Many businesses have employees working remotely across multiple states. Even if your company doesn’t own property or have a physical office in those states, the presence of remote workers can establish nexus, requiring corporate income tax filings, payroll tax withholding, and possibly sales tax registration.
  
  Example: A Florida-based marketing firm hires a remote employee in California. Even though the company has no office in California, it may be required to file state income tax returns there and withhold California state income tax from the employee’s paycheck.
  
  
• Temporary Remote Work Could Still Trigger Nexus
  
  Employees who work remotely on a temporary basis—such as during the pandemic or for personal reasons—can still create nexus, depending on the state’s rules.
  
  Example: An employee who normally works in Texas decides to work remotely from New York for six months. New York may require the employer to register for state payroll taxes and file tax returns, even though the company has no other New York-based operations.
  
  
• States Are Cracking Down on Noncompliance
  
  With states facing revenue shortfalls, tax agencies are aggressively enforcing nexus laws. Businesses that fail to comply may face audits, back taxes, interest, and penalties.

How to Stay Compliant

• Track Employee Locations
  
  Businesses should implement policies to track where employees are working. Using payroll software or HR systems that monitor employee locations can help identify potential tax risks early.
  
  
• Register for Tax Obligations as Needed
  
  If your business has remote employees in multiple states, consult with a tax professional to determine where you need to register for:

• • State income tax filings
  • Sales tax collection and remittance
  • Payroll tax withholding
  • Unemployment insurance contributions
• Review State-Specific Rules
  
  Each state has different rules regarding remote work nexus. Some states have temporary relief measures, while others aggressively pursue businesses with remote employees.
  
  
• Consider a Remote Work Policy
  
  Businesses should create clear policies regarding where employees can work remotely to limit unexpected tax exposure. Policies might include restricting work locations to states where the company already has tax compliance processes in place.
  
  
• Work with a Tax Professional
  
  Navigating state tax nexus rules can be complex, and the consequences of noncompliance can be costly. A tax advisor or CPA can help determine your tax obligations and develop a compliance strategy.

Final Thoughts

Remote work offers many benefits, but it also introduces state tax nexus risks that businesses cannot afford to ignore. Companies with remote employees should proactively assess their tax exposure, implement tracking systems, and seek expert guidance to remain compliant.

If you need help determining your company’s state tax obligations, leave a comment below or feel free to contact me directly. I’m happy to help!