Let’s be honest. The shift to remote and hybrid work was a liberation for many. But it also threw a massive, complicated wrench into the world of state and local taxes. What used to be simple—you work in an office in one state, you pay taxes there—has become a tangled web of potential obligations.
Here’s the deal: your employee’s home office isn’t just a spare room with a laptop. For tax purposes, it can be a nexus-creating physical presence. That’s a fancy way of saying it can trigger tax filing requirements in a state where your company doesn’t have a traditional office. And that changes everything.
The Core Challenge: It’s All About “Nexus”
Think of “nexus” as a connection. A significant enough connection between your business and a state that obligates you to follow its tax rules. Historically, this was based on physical things—a store, an office, a warehouse.
Now, with a distributed workforce, an employee working from their kitchen table in Colorado can create income tax withholding obligations for your Delaware-based company. That same scenario might also create sales tax nexus if that employee is involved in sales. It’s a domino effect.
The Two Main Tax Headaches You’ll Face
For employers, this boils down to two primary, and often parallel, compliance tracks.
- Withholding & Income Taxes: You are generally required to withhold state (and sometimes local) income taxes for the state where your employee physically performs the work. A hybrid employee splitting time between your NYC office and their home in New Jersey? That likely means withholding for both states, with a reciprocal agreement or credit situation to navigate.
- Corporate Income & Franchise Taxes: Having an employee in a state can create corporate income tax nexus, meaning your company now owes taxes on a portion of its profits to that state. Figuring out what portion—that’s the art and science of apportionment.
The Hybrid Worker’s Double-Life: A Tax Compliance Puzzle
Hybrid arrangements are, frankly, where things get especially messy. An employee might live in one state, commute to an office in another two days a week, and maybe even spend a month working from a family home in a third state. Each of those states has its own rules about what constitutes a “taxable day.”
Some states have a “convenience of the employer” rule. This is a big one. In states like New York, if your employee is working remotely for their own convenience (not because the job requires it), their wages may still be sourced to and taxed by New York. So your employee living in Connecticut but working remotely for a NYC-based company? They might owe New York taxes on 100% of their wages, even though they never cross the border.
| State Rule Type | How It Works | Example States |
| Convenience of the Employer | Remote work wages sourced to office location if remote by choice. | New York, Delaware, Nebraska* |
| Physical Presence | Wages sourced to where the work is physically done. | California, Texas, Illinois |
| Reciprocal Agreements | States agree you only withhold for state of residence. | D.C./Virginia, Pennsylvania/New Jersey |
*Rules are complex and evolving—always verify with a tax pro.
Local Taxes: The Plot Thickens
Just when you think you’ve got a handle on states, local taxes swoop in. Cities like New York City, Philadelphia, and Denver have their own local income taxes. An employee moving from Manhattan to suburban Westchester could shift your withholding obligation from NYC tax to a different local tax. It’s a layer of granularity that can’t be ignored.
Practical Steps to Start Untangling the Web
Okay, this is overwhelming. We know. The key is to start mapping, not panicking. You can’t manage what you don’t track.
- Audit Your Workforce Locations: Get a clear, updated record of where every employee actually works, including hybrid schedules and any temporary relocation stints. A simple spreadsheet is a start.
- Understand “Source” Rules: For each state (and locality) on your map, research their income sourcing rules. Is it physical presence? Do they follow the convenience rule? This dictates your withholding duty.
- Register & Withhold: Once you’ve established nexus and a withholding obligation, you must register with that state’s tax agency and set up payroll to withhold correctly. Falling behind here leads to penalties and interest—it’s a major pain point.
- Revisit Corporate Apportionment: Work with your tax advisor to adjust how you apportion your company’s income across states. That remote employee in Arizona likely means you’re now filing a corporate tax return there.
The Human Element: Communicating with Your Team
This isn’t just a back-office problem. It directly impacts your employees’ paychecks and personal tax returns. Transparency is non-negotiable. You need to communicate why their W-4 might need updating, or why state taxes are being withheld for a state they’ve never visited on business.
Provide clear guidelines on reporting work location changes—even temporary ones. A two-week working vacation in Florida can have tax implications. Make it easy for them to report, and stress that it’s for their compliance too. A little proactive communication prevents a lot of frantic April phone calls.
Looking Ahead: A Patchwork Future
The legal landscape is, to put it mildly, in flux. States are desperate for revenue and playing defense. Some are pushing aggressive nexus interpretations; others are considering more uniform rules. There’s no federal solution on the immediate horizon.
This means your strategy can’t be static. What’s compliant today might be challenged tomorrow. The cost of getting it wrong isn’t just financial—it’s operational chaos during an audit.
In the end, navigating this new terrain is less about finding a single perfect answer and more about building a resilient, well-documented process. It’s about accepting complexity as the new normal and putting in the work to map your unique footprint. The freedom of remote work is incredible, sure. But it comes with a stack of tax forms no one saw coming.
