Expanding your workforce across state lines can create unexpected nexus and payroll tax obligations. Many businesses unknowingly trigger tax liabilities simply by hiring remote employees, storing inventory, or conducting sales in new jurisdictions. This guide explains how nexus works, when it applies, and how to stay compliant with payroll tax obligations in multiple states.
What Creates Nexus and Payroll Tax Obligations?
Nexus determines whether your business must file and pay taxes in a state. When it comes to payroll tax obligations, the following factors commonly establish nexus:
1. Physical Presence (Traditional Nexus)
- Offices, warehouses, or retail stores – Having a brick-and-mortar location in a state almost always creates a nexus.
- Employees working on-site – Even temporary assignments (e.g., trade shows, client visits) may trigger tax requirements.
- Inventory storage (Amazon FBA sellers) – If your merchandise is stored in a state (like New Jersey or California), you may owe taxes there.
2. Economic Activity (Modern Nexus Rules)
- Remote employees – Hiring out-of-state workers (e.g., a New York company employing someone in Massachusetts) establishes payroll nexus.
- Revenue thresholds – Some states impose payroll tax obligations once you exceed a certain payroll or sales amount (e.g., $100,000 in revenue).
3. Independent Contractors vs. Employees
Misclassification can lead to unexpected nexus. Some states (like California) treat contractors like employees for tax purposes if they function similarly.
Key Takeaway:
If your business has any of these connections to a state, you likely have nexus and payroll tax obligations there.
How Nexus Affects Payroll Tax Compliance
Once nexus is established, businesses must:
1. Register as an Employer in the State
- Obtain a state tax ID.
- Set up payroll tax accounts for withholding.
2. Withhold the Correct Taxes
- State income tax (rates vary—some states have none, like Texas).
- Local payroll taxes (some cities, like Philadelphia, impose additional taxes).
- Unemployment insurance (SUTA) – Rates differ by state.
3. File and Pay Taxes on Time
- Deadlines vary (monthly, quarterly, or annually).
- Missing filings can lead to penalties.
Pro Tip:
Use payroll software that automatically tracks nexus and payroll tax obligations across states to avoid errors.
Common Compliance Mistakes (And How to Avoid Them)
Many businesses run into trouble by:
- Assuming remote workers don’t create nexus – They often do.
- Ignoring inventory storage – Amazon FBA sellers frequently overlook this.
- Misclassifying workers – Contractors may still trigger nexus in some states.
Solution:
- Regularly review where employees and contractors work.
- Consult a tax professional when expanding into new states.
Strategies for Managing Multi-State Payroll
1. Centralized Payroll Systems
Invest in payroll software that automatically:
- Tracks employee work locations
- Calculates multi-state tax withholdings
- Generates required filings
2. Professional Employer Organizations (PEOs)
PEOs can handle:
- Multi-state payroll processing
- Tax filings and compliance
- Benefits administration across states
3. Regular Nexus Reviews
Conduct quarterly assessments to:
- Identify new nexus triggers
- Adjust withholding as needed
- Stay ahead of law changes
The Future of Nexus and Payroll Tax Obligations
As remote work continues growing and states seek more tax revenue, we can expect:
- More states adopting economic nexus for payroll
- Increased enforcement efforts
- New legislation around remote worker taxation
- Potential federal standardization efforts
Navigating nexus and payroll tax obligations is critical for businesses hiring across state lines. Key steps include:
✔ Determining where you have nexus (employees, inventory, sales).
✔ Registering for payroll taxes in each applicable state.
✔ Using automated payroll systems to ensure compliance.
Failing to comply can result in audits, fines, and back taxes. If you’re unsure about your payroll tax obligations, seek expert advice to stay protected.