One Remote Hire Can Put Your Agency on the Hook in a State You've Never Visited

Here's the short answer. When somebody performs work for your agency from another state, that state can generally require you to register as an employer, withhold its income tax from their wages, pay into its unemployment insurance fund, and in many cases file a business tax return. It doesn't matter that you have no office there. It doesn't matter that the person is part-time. And it starts the day they start working, not the day you find out.

That's the trigger. One person is enough.

I've been a CPA for more than 23 years, and my firm works with more than 70 marketing and advertising agency owners every month. About half of our clients have a multi-state filing requirement, and many of them didn't know it when they came to us. They'd been working with a generalist CPA, somebody who doesn't live inside agency businesses, and the question never got asked.

It's easy to see how it happens. An agency hires a great strategist who lives somewhere else, everybody's thrilled, and nobody in that conversation is thinking about payroll registration. Why would they? The hire was a talent win. The tax consequence shows up in a different part of the building, usually months later, sometimes years.

I'll be honest about what this article is and isn't. It's not a warning that you shouldn't hire remotely. Distributed teams are how agencies get access to talent they could never afford locally, and that's a genuinely good thing. It's a warning that the paperwork is real, it's cheap to handle at the start, and it gets expensive the longer it sits.

Why Doesn't Your Office Location Protect You?

Because the rule follows the work, not the headquarters.

For a long time, a state could only reach a business that had a physical presence inside it, and physical presence meant something you could point at: a storefront, a warehouse, an office. That's still the concept. What changed is what counts as physical presence.

A human being performing work counts. Their kitchen table is your physical presence in that state.

So the analysis doesn't care that your lease is somewhere else. It asks a simpler question: is somebody doing work for you inside our borders? If the answer is yes, the state generally has what it needs.

A few things people expect to matter and don't. It doesn't matter if the employee is part-time. It doesn't matter if they fly to headquarters regularly. It doesn't matter whether you recruited them there or they moved there after you hired them. It doesn't matter that they never talk to clients.

And here's the one that surprises owners most: it doesn't matter whether you crossed any sales threshold in that state. Those thresholds are a separate test on a separate tax. A single remote employee can create an income or franchise tax filing obligation in a state where you've sold nothing at all.

What Exactly Does One Remote Employee Trigger?

Usually a stack of obligations rather than a single one, and they don't all arrive together. Which ones apply depends on the state and the person's role.

Employer registration. You register with the state's tax authority as an employer doing business there. This is typically the first and most immediate item.

State income tax withholding. You withhold that state's income tax from their wages and remit it on that state's schedule, using that state's forms.

Unemployment insurance. You register with and pay into the state's unemployment fund. This is a separate agency from the tax department in most states, so it's a separate registration.

A business tax return. In many states, that employee alone is enough to require your agency to file a state income or franchise tax return.

Notice that most of that list is administrative rather than expensive. The withholding isn't your money, it's the employee's. The unemployment contribution is real but modest. Even the business return often produces a small apportioned tax plus a minimum fee.

That's the part worth sitting with. The first cost of getting this right is paperwork. The cost of getting it wrong is years of unfiled returns, unremitted withholding, penalties, and interest, discovered by somebody other than you.

What's the Convenience of the Employer Rule?

This is the one that inverts what everybody assumes, so it's worth slowing down for.

The natural assumption is that when your employee moves to a new state, the tax obligation moves with them. You stop withholding at home, you start withholding there, and it's a swap.

For a handful of states, that's wrong. The obligation at home doesn't leave.

Under a "convenience of the employer" rule, if your business is based in one of these states and your employee works remotely from somewhere else, you may still have to withhold your state's income tax on their wages, even though that person never sets foot in your state during the year. The employee's home state taxes those wages too, because that's where the work happened.

One paycheck. Two states withholding from it.

The escape hatch is narrow and it's the entire fight. Relief generally requires that the remote arrangement is a necessity of the employer rather than a convenience of the employee. Somebody who works remotely because you closed the office, or because the role genuinely has to be performed elsewhere, sits in a different position from somebody who simply prefers working from home. States read "necessity" narrowly, and the burden of showing it lands on you.

As of 2026, practitioner sources identify Delaware, Nebraska, New York, and Pennsylvania as applying a full version of this rule, with Connecticut and New Jersey applying narrower reciprocal versions that reach only residents of other convenience-rule states. Confirm that list before you rely on it. This is an active area, it moves with litigation and legislation, and the state-by-state details matter more than the headline.

Resident-state credits for taxes paid elsewhere soften the double hit sometimes, but only sometimes, and only partly. Your employee is the one who feels it, on their paycheck, which makes this a retention issue as much as a compliance one.

Do Independent Contractors Count?

Often, yes. And the label on the agreement isn't what decides it.

States look at behavior rather than paperwork. A contractor who works full-time hours, on your systems, under your direction, with no other clients, looks like an employee to a state auditor no matter what the contract says. That reclassification can bring the same registration and withholding obligations, plus back liability for the years it was mislabeled.

Separately, and this catches agencies specifically: a genuine contractor performing work on your behalf inside a state can create a nexus question for your business even when the classification is correct. A freelance designer, a contract developer, a subcontracted media buyer, somebody doing on-site work at a client's office in another state. What that creates depends on the state and on what they're actually doing there, but the question has to be asked rather than assumed away.

If your agency runs on a bench of freelancers spread across the country, that bench belongs on the same map as your payroll. This is the same reason it pays to think about staffing by the numbers rather than one hire at a time.

What If You Already Have People in States You Never Registered In?

First, this is common. Second, it's fixable. Third, the order of operations matters more than almost anything else in this article.

Nearly every state runs a voluntary disclosure program. The trade is consistent: you come forward, file returns for a defined lookback period, and pay the tax plus interest. In exchange, the state waives everything before that window and abates penalties. Lookback periods vary but generally run three to five prior tax years.

That window is the whole point. Without a program, a state's assessment period on an unfiled return is often unlimited, which means your exposure runs back to the year you created the obligation rather than to a capped number of years.

If your exposure spans several states, the Multistate Tax Commission runs a coordinated Multistate Voluntary Disclosure Program through its National Nexus Program that handles multiple participating states through one procedure, and typically lets you stay anonymous while terms get negotiated. Worth knowing: that program won't process an application where the good-faith estimate of tax owed to a state for the lookback period comes in under $500.

Now the timing, because it's decisive. Eligibility generally depends on coming forward before the state contacts you. Once a nexus questionnaire or an audit notice arrives for that tax type, the door usually closes for that state, and you're left with the full unlimited lookback and the penalties intact.

So the sequence is: find out what you have, quantify it, decide, and register after that. Registering first in a state where prior years are open can invite exactly the question a disclosure would have settled on better terms.

One piece of honest bad news specific to this article's fact pattern. Voluntary disclosure programs tend to treat trust-fund taxes more harshly than income taxes. Money you withheld from an employee's wages and never remitted was never yours to hold, and states take that position seriously. Penalty relief on withholding is often narrower than on income tax, or unavailable. That's an argument for looking sooner, not for looking away.

Getting your records straight is the precondition for any of it, which is the same groundwork that makes clean books worth having for every other reason.

Who Should Ignore This Article?

Some real answers.

If everyone on your payroll works in your home state, this doesn't apply to you. No remote humans, no remote trigger. Read it again before your next out-of-state hire, not today.

If you're a solo owner with no employees and no contractors, skip it. Your exposure comes from where your clients are, which is a different mechanism entirely and lives in the companion piece.

If you have exactly one remote person and you already registered payroll in their state, you've done the main thing. The open questions are whether a business return is also required there and whether your home state has a convenience rule. Two questions, one conversation.

The agencies that need this are the ones who've been hiring remotely for a few years without ever mapping it, especially if people have relocated mid-employment. That's the fact pattern where the years quietly stack up.

What Should You Do Before Your Next Remote Hire?

Three things, and the first one takes an hour.

1. List every human who performs work for you and the state they perform it in. Employees and regular contractors both. Include anyone who moved during the year, and note when they moved, because the obligation follows the calendar. Your payroll system already knows most of this. Nobody has ever asked it this particular question.

2. Ask two questions per state on that list. Are we registered here for payroll and unemployment? And does this state also want a business tax return from us? Those have specific answers, they're knowable, and they're much cheaper to get now than after a notice.

3. Make the check part of hiring, not an annual project. The triggers are specific and predictable: a new hire in a new state, an existing person relocating, a contractor becoming full-time in practice. Tie the review to those events and it stays current on its own. Tie it to the calendar and it goes stale between hires, which is exactly when the exposure gets created.

And while you're at it, get the convenience-rule question answered for your own state before your next remote offer goes out. Whether the arrangement is documented as an employer necessity is a decision that's nearly free to make correctly at the start and genuinely difficult to reconstruct under audit two years later.

Frequently Asked Questions

Does hiring one remote employee in another state create a tax obligation there? Generally yes. A single employee performing work in a state is usually enough to require employer registration, state income tax withholding, and unemployment insurance contributions, and in many states it also creates a business income or franchise tax filing requirement.

When does the obligation start? When the work starts, not when you discover it or when the state contacts you. That's why unregistered periods accumulate quietly.

Does it matter that we never crossed a sales threshold in that state? No. Sales thresholds are a separate test on a separate tax. An employee can create an income or franchise tax filing obligation in a state where you have no sales at all.

Can two states really tax the same wages? Yes. Under a convenience of the employer rule, your home state may still claim wages your employee earned while working remotely elsewhere, and the state where they actually worked taxes them too. Resident-state credits reduce the overlap in some cases but don't always eliminate it.

Do contractors create the same problem? They can. States look at how the relationship actually works rather than what the contract calls it, so a contractor functioning as an employee can carry the same obligations. A properly classified contractor performing work in a state can still raise a nexus question for your business.

Does Public Law 86-272 protect us? No. That federal statute only shields businesses soliciting orders for tangible personal property. An agency sells services, so it gets no protection from it.

We've had remote people for years and never registered. How bad is it? Fixable, and better the sooner you look. Most states run voluntary disclosure programs that cap the lookback at three to five years and waive penalties, but eligibility generally ends once the state reaches out to you first. Withheld wages typically get less penalty relief than income tax, which is a reason to move rather than wait.

The Bottom Line

Where your people work decides where you file. Not your lease, not your letterhead, and not where you think of the agency as being located.

That's not an argument against hiring remotely. It's an argument for making the paperwork part of the hire, because it costs almost nothing at the start and compounds when it's ignored.

If you've got humans on payroll in states you're not registered in, or you're about to make an offer to somebody in a new one, Book a Free Tax Analysis. We'll map where your team actually creates obligations and what it takes to be clean, so your agency can flourish without a stack of unfiled returns building up behind it.

And if your clients are spread across states too, that's a separate trigger running on completely different rules. I wrote that one up on its own, because where your revenue lands is decided by your client list rather than your org chart.

Craig S. Cody, CPA, is a Certified Tax Coach and a former NYPD Lieutenant. His firm works with more than 70 marketing and advertising agency owners every month, helping them keep more of what they make through proactive tax planning.

This article is general information, not tax advice for your specific situation. State rules in this area change frequently, and the convenience-rule state list in particular moves with litigation and legislation. Confirm current rules and your own facts with your advisor before acting.