Overview

Multi-state payroll for remote employees is about paying people accurately. It also means withholding, filing, and insuring in the right places—based on where they live and where they actually work.

If your team spans states, you’ll need a clear plan for state income tax sourcing, reciprocity, convenience rules, unemployment (SUTA) localization, and local taxes. You also need a workflow to register, file, and correct when things change.

This playbook gives HR, payroll, and finance leaders a practical, end-to-end guide. You’ll see how to decide where to withhold, when to register new accounts, how to allocate wages, how to avoid double taxation, and when a PEO/EOR is worth it.

Along the way, we link to authoritative resources and include worked examples and checklists. Use them to implement multi-state payroll for remote employees with confidence.

How multi-state payroll works for remote and traveling employees

In multi-state payroll, tax and compliance follow where services are performed. There are special rules for reciprocity and “convenience-of-the-employer” states.

Payroll teams must track employee work locations and days. That tells you where to withhold, which accounts to open, and how to split wages on the W‑2.

The baseline rules are simple. Resident states tax residents on all income (with credits for tax paid elsewhere). Nonresident states tax the income earned while physically working there.

Deviations from that baseline—like reciprocity agreements and convenience rules—change where withholding happens and when registration is required. Good location tracking (timesheets with work state, travel calendars, geofencing, or attestation tools) turns those rules into accurate paychecks and filings.

Resident vs. nonresident withholding and sourcing basics

Withholding usually follows the work state, while the resident state picks up credits for taxes paid elsewhere. For a fully remote employee, the “work state” is typically their home office state. For travelers, it’s wherever days were worked.

The common pattern is this. Withhold in each nonresident work state for income sourced there unless a reciprocity agreement applies. Then withhold in the resident state for any residual liability after credits.

If the work state has no income tax, the resident state typically requires withholding on all wages. You’ll register there because the remote employee creates employer nexus.

Tip: collect employee addresses and planned travel in onboarding. Have them update if work locations change mid-year.

Employer nexus and registration triggers

You must register for employer withholding and unemployment where you have nexus. A single remote employee performing services in the state often creates nexus.

Physical presence (a home office), in-state payroll, or in-state management generally triggers withholding and SUTA registration. You may also need foreign qualification of your entity.

Expect to open at least two state tax accounts (withholding and unemployment), and sometimes local accounts. If you are hiring in a new state for the first time, plan for foreign qualification, state registrations, new-hire reporting, and local payroll tax accounts.

Pitfall: delaying registrations past first payroll can cause avoidable penalties.

Reciprocity agreements and when resident-only withholding applies

Reciprocity agreements let employees who live in one state and work in another have tax withheld only for their resident state. This avoids work-state withholding.

These agreements are common around shared borders (e.g., DC/MD/VA, IL/IA, PA/NJ). Each agreement has its own coverage and certification form.

Operationally, you must collect the employee’s reciprocity exemption certificate or affidavit and store it with payroll records. Otherwise, you must withhold for the work state.

Reciprocity does not change unemployment (SUTA) or local tax rules, and it rarely applies to city taxes. Pitfall near borders: local taxes (like Philadelphia Wage Tax) and employer nexus still apply even when states have reciprocity—don’t skip local registrations.

Do I need to withhold in a no–income-tax state if the employee lives in a tax state with reciprocity? If the work state has no income tax (e.g., TX, FL, WA), withhold nothing for that state.

However, a full-time remote employee’s residence will generally be your work state for payroll purposes. You’ll register and withhold in the employee’s resident tax state.

Nonresident withholding thresholds by state vary. Some states require withholding from the first day. Others allow day or dollar thresholds before withholding is required, and a few have administrative de minimis safe harbors.

Thresholds change—monitor your employees’ duty days and check the current guidance from each state tax agency. Lawmakers have repeatedly proposed a 30-day national standard under the Mobile Workforce State Income Tax Simplification Act. You can track proposals on Congress.gov (Mobile Workforce search).

Convenience-of-the-employer states: what changes for fully remote roles

Convenience-of-the-employer rules source wages to the employer’s state if the employee works out-of-state for their own convenience rather than a business necessity. The classic example is a New York employer with an employee working from home in New Jersey.

New York may still treat those wages as New York-sourced under its Convenience of the employer test.

As of today, the core convenience states include New York, Delaware, Nebraska, and Arkansas. Connecticut and New Jersey have “convenience” provisions that can apply based on residency and whether the other state imposes a convenience rule. This can affect credits and withholding.

Key scenarios:

Tip: Convenience rules are nuanced. Train managers to avoid “optional remote” language in offer letters when you intend business-necessity remote arrangements.

Where and when to register: foreign qualification, withholding, SUTA, and local accounts

When you hire your first remote employee in a new state, assume you need to do all of the following. (1) Foreign qualify the company if you’re not already registered. (2) Open withholding and unemployment accounts. (3) Register for applicable local taxes. (4) Start new-hire reporting and garnishment compliance.

You’ll generally find the right portals on each state’s tax and labor agency websites.

The “where” is driven by employee work location and SUTA localization. The “when” is before first payroll subject to that state’s taxes.

Some states take a few days to issue account numbers; others can take weeks. Build lead time into your hiring plan.

Pitfall: skipping local registrations (e.g., Ohio municipalities, Philadelphia Wage Tax, Denver OPT) can lead to unexpected notices even when state accounts are set up.

First 30 days checklist for your first hire in a new state

Start by mapping obligations. Then execute registrations in a sensible sequence so payroll goes out cleanly and filings are on time.

SUTA localization in multi-state scenarios

Unemployment insurance (SUTA) is paid to one state per employee. Use the “localization of work” test and tie-breakers: (1) where work is localized; if not, then (2) base of operations; if not, then (3) place of direction and control; if not, then (4) employee residence. This framework is summarized in the U.S. DOL’s comparison of state UI laws.

For a home-based employee, SUTA is usually the home state (localized work). For travelers, if significant services are in multiple states, look to base of operations (e.g., a primary office) or where supervision is directed. Only if those fail do you select the residence.

Mid-year moves can change the SUTA state. Coordinate wage bases so you don’t overpay or underpay when switching. Most states do not allow wage base transfers across states, so you may start a fresh wage base in the new state.

How do I determine the correct SUTA state when an employee works from home in State A, travels to State B, and payroll is processed in State C? Ignore the payroll processing state.

If most services are in A, SUTA is A (localized). If services are split, check whether the employee’s base of operations is in A or B. If neither, use the state where supervision is controlled. If still unclear, use the residence.

Tip: document your analysis in the employee file to defend your choice in an audit and avoid “SUTA-dumping” accusations (shifting wages to a low-rate state).

Local income taxes: Ohio municipalities, Pennsylvania EIT/Philadelphia Wage Tax, Denver OPT

Local taxes add a second layer of registration and withholding beyond the state. They do not always respect state reciprocity.

Ohio municipalities levy income taxes under a statewide framework. Employers generally withhold for the municipality where the employee works and sometimes for the residence municipality, subject to local credits.

You may need to register with a municipal administrator (e.g., RITA/CCA). Set up correct worksite codes in payroll.

Pennsylvania Earned Income Tax (EIT) under Act 32 requires employers with a PA work location to withhold EIT using the employee’s residence PSD code and rates. Employers report and remit through the designated tax officer for the county. See the PA DCED’s Local Income Tax information.

Reciprocity with another state does not remove EIT obligations. Philadelphia is separate: employers must withhold the city Wage Tax at resident vs. nonresident rates. Nonresident liability depends on where services are performed (and whether remote work is an employer requirement vs. employee convenience).

Denver’s Occupational Privilege Tax (OPT) is a head tax triggered when an employee earns at least $500 in a month while working in Denver. Both the employee and employer owe monthly OPT amounts, and employers must register and withhold—see the City’s Occupational Privilege Tax overview.

Edge case: a remote employee who never works within city limits is not subject to OPT even if their manager or clients are based in Denver.

Tip: Maintain a local-tax matrix for each worksite. For Ohio and Pennsylvania, confirm both worksite and residence settings inside payroll to automate the correct local rates.

Allocating wages across states and avoiding double taxation

When employees work in multiple states, allocate wages to each state based on duty days or other reasonable methods allowed by that state. Then withhold accordingly.

The resident state will generally allow a credit for taxes paid to other states. This prevents double taxation of the same income.

For hourly staff, use actual hours or days worked in each state. For salaried staff, apply a duty-day ratio each pay period or monthly and true-up at quarter-end if needed.

If a convenience-of-the-employer rule applies, allocate differently. For example, allocate all to the employer state unless business necessity is documented.

Tip: explain the approach to employees early—especially commuters and frequent travelers—so they expect multiple state lines on the W‑2.

Worked examples: monthly travel with salaried vs. hourly employees

Salaried example: A $120,000/year employee ($10,000/month) lives in NJ, is employed by a NY company, and spends 6 NY duty days and 14 NJ duty days this month. If NY’s convenience rule applies (no business necessity for NJ), source all $10,000 to NY and withhold NY tax. The NJ resident return will generally claim a credit for NY tax paid.

If you can document business necessity for NJ, allocate by duty days. $10,000 × 6/20 = $3,000 to NY; $7,000 to NJ. Withhold for both.

Hourly example: A $40/hour employee works 80 hours in PA and 40 hours in OH in the month (120 hours total). Wages are $4,800; allocate $3,200 to PA and $1,600 to OH. Withhold state taxes accordingly, plus applicable local taxes (e.g., Ohio municipal worksite, Pennsylvania EIT/Philadelphia Wage Tax if applicable).

Tip: Keep a monthly allocation worksheet with duty days/hours and support (travel logs, calendars) in case a state questions your sourcing.

Workers’ compensation, disability, and PFML situs for remote staff

Insurance and statutory benefits generally follow where services are performed or where the employment is principally localized. For workers’ compensation, carry coverage in the state where the employee primarily works. Add “other states” coverage if they travel, and verify extraterritorial reciprocity rules if they temporarily work elsewhere.

State disability and paid family and medical leave (PFML/TDI/SDI) programs (e.g., CA SDI/PFL, NY DBL/PFL, MA PFML, WA Paid Leave, OR Paid Leave, CO FAMLI, DC Paid Leave, and others) typically require employer registration and payroll deductions when the employee’s work is localized in that state. Confirm contribution splits and wage caps. Enable the correct deductions in payroll alongside state income tax.

Tip: add PFML/TDI account setup to your new-state hiring checklist, just like withholding and unemployment.

Compliance workflow: hiring your first remote employee in a new state

The fastest way to get multi-state payroll right is to run a repeatable, milestone-driven workflow from offer letter to first filing. Start with a pre-hire assessment: where will the employee actually work (state, city), how often will they travel, and do convenience or reciprocity rules apply?

Then execute the setup. Complete foreign qualification (if needed), state withholding and unemployment accounts, local registrations, PFML/TDI enrollment, and new-hire reporting. Configure payroll with state/local rates, SUTA account, and any local PSD/worksite codes.

Collect employee forms (state withholding, reciprocity, local forms) and set up duty-day tracking. Calendar deposit frequencies for the new state (e.g., monthly or semi-weekly) and first return deadlines (quarterly state returns, local filings where required). Finally, review the first payroll with a checklist to confirm taxes are calculating in all applicable jurisdictions before you remit.

Process fixes: employee moves, mid-year corrections, and W-2/W-2C state fixes

When an employee moves or your team discovers a sourcing error, correct the current payroll first. Then clean up history with amended filings.

Update the work location in payroll to switch withholding and local taxes on the next check. Re-evaluate SUTA localization, and enroll in any new PFML/TDI programs as needed.

For prior periods, amend state and local returns to reallocate wages and taxes and request refunds or pay shortfalls. If the W‑2 has already been issued (or will be wrong), issue a W‑2C splitting wages and withholdings by the correct states and locals.

Keep employees informed. Residents usually claim credits for taxes paid to other states, so corrections can change their refunds or balances due.

Tip: document your corrections and state communications. Many states waive or reduce penalties when you demonstrate prompt voluntary compliance.

Costs, risks, and penalties: what to budget and what to avoid

Budget upfront and ongoing costs so multi-state compliance doesn’t surprise you later. Typical early costs include foreign qualification ($100–$300 filing plus $100–$200/year registered agent), state tax accounts (often $0–$50 per account), and local registrations (often $0–$50).

Payroll platforms with multi-state/local tax capabilities often run a monthly base fee ($40–$100) plus per-employee fees ($6–$20 PEPM). Add-on local filings can incur small per-filing charges.

For ongoing taxes, plan for new-employer SUTA rates (often 1%–3% up to the state wage base) and PFML/TDI contributions where applicable. PEO admin fees typically range from $80–$150 PEPM (or 2%–6% of payroll), while domestic EOR offerings often run higher per employee and are best for speed and short-term coverage.

Penalties for late withholding filings or payments commonly stack interest plus a percentage penalty (often in the 5%–15% range depending on the state and delinquency period). Local agencies may assess separate penalties.

Risk hot spots: convenience states, unregistered local taxes, and untracked traveler days.

Build vs. buy: when a PEO/EOR makes sense vs. in-house registration

Deciding between in-house registrations and a PEO/EOR depends on headcount dispersion, local tax complexity, speed-to-hire, and risk tolerance. If you’re hiring a single employee in a new, high-complexity jurisdiction (e.g., convenience state plus locals) and need to start within two weeks, a PEO/EOR can be a bridge while you register.

If you’re building durable presence (3+ employees or ongoing hiring) in a state, in-house registrations usually cost less over 6–12 months.

Use this quick lens:

Tools, checklists, and authoritative resources

You’ll move faster and reduce risk by bookmarking official portals and using a consistent checklist at each hire. Start with these references and incorporate them into your SOPs.

Practical next step: adapt the “First 30 days” checklist into a reusable template, attach it to your ATS/onboarding workflow, and require a work-location attestation from every remote/hybrid hire so payroll gets the data it needs on day one.