How To Hire Employees Who Live in Other States

How to Hire a Remote Team (and keep Uncle Sam happy)

A while back, Ian wrote about how to hire your first employee. It was a popular post and we’ve had requests for more tips on starting and running a small business. And why not? It’s a tough thing to do, and UserScape has been thriving for over a decade now. Ian and Jamie (our cofounder and the other half of the Landsman Dream Team) must be doing something right!

Jamie’s in charge of Operations around here, which means she runs the show behind the scenes; she knows about taxes and payroll and HR and, you know…how to run a business.

She’s agreed to write a series of posts for us about running a small business, and this is the beginning of that series.

Why Remote Employees?

UserScape is a fully distributed company; at the moment, our staff of 7 is located in 6 different states, from New York (Ian & Jamie) all the way to California (that’s me!), with stops in Connecticut, Arkansas, North Carolina, and Tennessee. Managing a distributed team has its own set of unique complications, but Jamie’s got it down to a science.

But don’t take my word for it. Here she is with her bad self:


How To Hire Remote Employees

by Jamie Landsman

After reviewing a pile of resumes you found the perfect person to join your team. The rub: they live outside the state in which your business is incorporated. No need to fret—but there are a few considerations that will impact the steps you take to hiring your new team member.

Nexus, the root of all evil.

OK, maybe it’s not evil (I get that states need the revenue and such) but the concept of nexus can be confusing, and it’s important you understand what it is and how it will impact your business as you move into a new state.

In short: Nexus, with respect to tax law, is the presence a company has within a state. 

From About.com’s business law definitions:

nexus in general means a connection. The term nexus is used in tax law to describe a situation in which a business has a “nexus” or presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state. Nexus describes the amount and degree of business activity that must be present before a state can tax an entity’s income. If a taxpayer has nexus in a particular state, the taxpayer must pay and collect/remit taxes in that state.

In many states, nexus is typically determined through a separate set of criteria for State Income, Withholding, and Sales Taxes. A company maybe subject to Income and Withholding taxes for the state but not Sales Tax. This determination is typically made at the governing tax entity level.

However generally speaking nexus (of all tax types) is determined by one or more the following criteria being met:

  • company has physical presence within a state
  • company employs a resident of the state
  • company solicits business within the state

OK, now what?

Not deterred, you find someone you want to hire who is outside your state (outside the U.S. is outside the scope of this article) but aren’t sure how to proceed. Here are the basic steps UserScape has followed when onboarding each of our 5 out-of-state employees.

This process could vary somewhat by company and state so be sure to check with your accountant first.

Hire a payroll provider.

Once you start hiring, especially when that employee is outside your incorporated state, you’ll want to use a payroll provider. While there is a cost, a payroll provider will ensure the proper witholding taxes for all jurisdiction you’re in are collected and filed timely. You could do this yourself but you would be a crazy fool to do so. You’ll have to devote excess time to staying on top withholding tax changes and filing deadlines and you’ll still screw it up and open yourself for a potential audit. Not worth it. FEE: Varies wildly.

Hire a Registered Agent.

This one is totally crazy, makes no sense for modern economies, and is a hold over from the good old days; but you still have to do it. Once you hire in a state (i.e., establish a presence), you need a physical location. Every single state entity you deal with will want your physical address in the state. Some for mail purposes and others just to have your location in the state on record. Clearly, you don’t want to give your employees’ home address on government forms. So, there are companies that specialize in being the local address for companies like yours. They will provide you with a physical address in any state you need. They will forward any mail you receive at that address on to your home state. Nuts, yes, but necessary. Warning, these RA companies are a bit shady seeming (think some domain name companies); I suggest starting with your accountant. Most accountants should be able to recommend one their clients work with. FEE: $125 annual/per state.

Register with Secretary of State.

You can think of hiring an employee in another state like starting a new business. First stop in the state is the Secretary of State. This will register your business in the state. Typically you must provide info like: business name (if another business is already using that name, you’ll have to change it to something else), local address (thank you very much Registered Agent!), Federal Tax ID, and Officer information. Once you’re approved, they will issue you a business ID. It’s with this ID that you can continue on to the next entities. FEE: $300 annual.

Register with Department of Labor for unemployment withholding ID.

This is usually a simple form with no upfront cost. As soon as your unemployment withholding ID is received, you need to pass it on to your payroll provider so they can file returns on your behalf. No worries if you don’t get this number before Employee #1 starts. Payroll providers know all the tax tables for every jurisdiction so they can start withholding on day 1. They can also file the withholding return (typically quarterly) in an “applied for status” and start using your ID number when you get it. However, don’t hold off  because your payroll provider charges an extra fee for this service! So save yourself money and headache and just get the withholding ID number as part of your new hire process.

Register for Sales and Use Tax.

My personal favorite because it varies so from state to state. Most states are now wise to this revenue stream and are happy to take your money but know that in many states, tax code states that unless you are delivering a good/service (digital or physical), you are not subject to collecting/paying sales tax. Translation: all you SaaS people are most likely off the hook. Anyone with downloadable/self-hosted software is stuck collecting sales tax in the state just like the local deli and auto body shop. In any event, all companies should go through the process of registering. After a series of questions, the state Department of Revenue will determine whether or not your company is subject to collecting. If the determination is made you are, like Snappy Helpdesk, congratulations! You now have the task of integrating sales tax tables into your front end store and building back end reporting for filings that can range for monthly to year (depending on state). The nuts and bolts on this one alone could be a separate discussion. For another day, on we proceed!

Understand any local tax jurisdiction.

Our first hire was in Louisville, KY. We were unaware that the city of Louisville had its own sales tax and withholding tax process. Paying fees that were more than the taxes taught us a valuable lesson: Always ask the Department of Labor, payroll provider and State Department of Revenue (typical governing body for Sales & Use Tax) if there’s a local withholding/tax.

Once through these steps, you’ll have all the work done with the various government entities to establish your out-of-state new hire. Congrats!


What’s next? Now you need to start thinking about benefits, time off policies, expense procedures…Subscribe now to be sure you don’t miss out on the next installment of Jamie’s Small Biz Operations series!

Questions, comments, advice? Please share in the comments section!

What other small business problems can Jamie help you with? Let us know!


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7 Comments

  • Stacie Reply

    Our company has remote employees in a few different states and have recently thought about hiring a full-time employee in NY. I have heard that this may be difficult and that we should have a lawyer in NY. Is there any truth to this? And as someone who has NY employees, do you think NY is more difficult than other states?

    • Ian Landsman Reply

      Well it’s our home state so it’s a little hard to say as we were setup here first. I’m not sure a lawyer is needed, but you should make sure you have an accountant that’s very familiar with companies working across multiple states. We end up asking our accountant a lot more questions than the lawyer.

  • Anna Reply

    Do you offer a group health insurance plan? If so, how do you get around the instate requirement of a lot of plans?

  • Linsey Gjerstad Reply

    Hi, You said you have an employee in AR. Does your corporation have to file a return in the AR also? I am getting ready to move to AR and my employer would like to keep me on remotely. We are trying to work out the logistics of how this would work. Our home base is CA. Thank you!

  • Alexandra Reply

    I have a question. I would only “work” for 1 month in California, for my current employer. I am moving down there and they would need me one more month, so I offered them to do it from California. The only thing I really need to do is read my emails on my mobile phone and maybe talk to some of my co-workers. Our legal advisor now said that it would create a Nexus and it’s impossible cause of the tax liability. Mind you, I still have my house and address here, where I live now. I am in the process of moving to another State and to make the transition easier, I offered to do some of my work form Cali. They now want to make me fly back and forth. Is this really necessary. I do not make any business or money. It’s just to stay on top of my emails really. That’s all there is to it. I appreciate your answers so much.

  • anon Reply

    Alexandra, your employer is correct. Doing any work inside of California can create tax nexus which is a nightmare for them, UNLESS your work is strictly related to being a salesperson (there is a special exception for that).

    It comes down to a few things:

    1) Do you plan to claim a California address or California source income on your federal tax return?
    2) Do you pan to file a California state income tax return?
    3) Is your employer aware of the fact that you’ll be working outside of their home state?

    If you answer “yes” to any of these three questions, then your employer is obligated to behave as though they do business in that state.

    You might be able to answer “no” to all 3 questions if, for example, you were to take a vacation outside of your home state, didn’t tell your employer that you were taking this vacation outside of your home state, and were not stupid enough to tell the state that you vacationed in that you were “working” there during your vacation. I.E. use some common sense.

    Even if you answered “no” to all three questions, and even if you only worked for one hour on one day in the alternative state (such as by checking your emails), if that state were informed that you were working there during that one hour, you create all of the same headaches as if you worked and lived there full time. Crazy, but true. This is primarily a problem for professional athletes and people who are way too honest.

  • Viv Reply

    Thanks for the very helpful post!
    My question is a little different, we are a pre-revenue software startup, and have a “manager” to manage our LLC. The manager is being paid through equity. So, do I need a local address in my state? (we are incorporated in another state, and have a registered agent in that state)
    Thanks!

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