As remote and hybrid work arrangements continue to reshape where employees live and perform services, payroll professionals are facing increased exposure to multistate tax compliance risks.
That challenge was the focus of the Capital Summit session “Essential Insights on Payroll Tax Compliance for Multistate Workforces,” presented by Michael Mahoney, Esq., Shareholder, and Stephen Kenney, Esq., Associate, of Ogletree Deakins. The session addressed state income tax withholding, unemployment insurance, paid family and medical leave (PFML) reporting, and employer registration obligations for distributed workforces.
“When we’re looking at state income tax withholding from the multistate perspective, it really is going to be a state‑by‑state analysis,” Mahoney said, noting that payroll teams must evaluate how individual state revenue codes interact as work arrangements evolve.
Where Services Are Performed Drives Withholding Obligations
Kenney explained that the fundamental payroll question remains whether a state can obligate an employer to withhold income tax from employee wages—a determination rooted in nexus.
“Nexus can be imposed on an employer whenever there is an employee that’s located within that jurisdiction,” Kenney said, adding that remote work alone can be sufficient to establish a withholding obligation.
From a payroll perspective, the primary driver is where services are performed, not where the employee resides. “You withhold based on where services are performed,” Kenney said. Residence becomes relevant primarily when determining whether credits apply to avoid double taxation.
In a common scenario, a resident of State A performs services in State B. The employer must withhold in State B, while the resident state may tax worldwide income but typically grants a credit for taxes paid to the nonresident state.
Hybrid and Remote Work Complicate Wage Allocation
Hybrid work arrangements complicate payroll reporting when employees split time between states. Kenney shared a real‑world example involving a North Carolina resident who regularly traveled to South Carolina for work.
Using employer‑provided vehicle data, the employer was able to determine the percentage of time the employee performed services in South Carolina. “At 25% of his wages get allocated to South Carolina,” Kenney said, resulting in multistate wage reporting on the employee’s Form W‑2.
Whether employees agree with the outcome is secondary, Kenney noted, to applying the rules correctly. “That’s how we have to apply the rules,” he said.
Exceptions Exist—but Are Limited
While some states offer de minimis thresholds for short‑term nonresident work, Kenney cautioned that most do not. “The majority of states don’t have a de minimis threshold,” he said. “It’s day‑one withholding.”
Reciprocity agreements between neighboring states can eliminate withholding for certain cross‑border workers, but only when employees properly certify residency using state‑specific forms.
Mahoney noted that some exceptions, however, favor states rather than employees—particularly convenience of the employer rules. Under these doctrines, states such as New York may tax nonresident employees working remotely if their assigned office is in the taxing state.
Kenney described the resulting conflicts as “payroll tax warfare,” pointing to retaliatory laws enacted by New Jersey and Connecticut that are narrowly targeted at New York.
Unemployment Insurance and State Registration Risks
Beyond income tax withholding, Mahoney emphasized that unemployment insurance (SUI) sourcing creates additional risk when employees work across state lines. Misclassification can lead to retroactive corrections and benefit eligibility disputes.
In one example discussed during the session, an employee later argued that incorrect payroll classification affected eligibility for benefits in a particular state, forcing the employer to revisit years of payroll data.
To administer withholding and unemployment insurance correctly, employers may also trigger state registration obligations, including Secretary of State filings, Department of Revenue withholding accounts, and unemployment insurance registration.
“Having a remote employee is not an exception,” Kenney said. “You may be obligating yourself to registration requirements.”
Paid Family and Medical Leave Reporting Evolves
The speakers also addressed PFML programs, which Kenney described as being in a “transition year.” States continue rolling out programs with varying contribution structures, including employee contributions, employer contributions, and employer “pickup” arrangements.
“For family leave benefits, the amount is reported as income, but it is not wages,” Kenney said. Medical leave benefits, however, may require applying third‑party sick pay rules and calculating inclusion ratios when contributions are blended.
Mahoney noted that IRS guidance issued in late 2024 and early 2025 has accelerated changes in reporting expectations, with some states ready to support W‑2 reporting sooner than others.
Home Office Expenses and Fringe Benefits
Remote work also raises payroll tax issues related to home office reimbursements. Kenney cautioned that for such expenses to be excluded from wages, the home office must qualify as the employee’s principal place of business—a standard most hybrid employees do not meet.
Cell phone reimbursements are easier to exclude if there is a “substantial non‑compensatory business reason,” Kenney said, provided reimbursements are reasonable and not a substitute for wages.
Best Practices: Tracking and Communication
As the session closed, both speakers emphasized the importance of tracking employee location and maintaining clear communication with workers and managers.
“If you don’t know where employees are working, you’re not going to be able to administer the rules,” Kenney said.
Mahoney added that employers should favor static hybrid arrangements over variable schedules to simplify wage allocation and reduce risk. He also warned that employees should be encouraged to seek permission before relocating. “Your geographic footprint and your registration obligations can be altered,” he said, if employees move without notice.
Payroll Takeaway: Multistate Compliance Essentials
- Withholding follows work location first. Residence matters, but where services are performed drives payroll obligations.
- Remote work creates nexus. A single remote employee can trigger state registration and withholding requirements.
- Exceptions are narrow. Most states require nonresident withholding from day one.
- PFML reporting is evolving. Payroll teams must track benefit type, contribution source, and state readiness.
- Tracking is critical. Accurate data on employee work location underpins all compliance decisions.
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