#multi state payroll

The shift to a fully remote or hybrid workforce has provided unprecedented flexibility and access to global talent for US small businesses. However, this same freedom has quietly ushered in the most complex era for financial compliance in a generation, particularly in the areas of bookkeeping and Payroll Services.

For business owners and financial managers, the stakes are critically high. The days of simple, single-state payroll are over. In the eyes of the IRS and state tax authorities, one remote employee in a new state is enough to create a "tax nexus," triggering new state income tax, unemployment, and local withholding requirements. Ignoring these New Payroll Rules is not just an oversight; it is a direct path to crippling penalties and back-pay claims.

The Compliance Crisis: Navigating New Payroll Rules for Remote Teams

The most immediate and urgent challenge for any US small business with remote employees is multi-state payroll compliance. The fundamental fact to grasp is this: your employee is subject to the labor laws and tax rules of the state where they physically perform their work, not your company's home state.

Nexus and Withholding: By late 2025, over 20 states had enacted or updated guidance to impose new registration and filing requirements on companies with even one remote worker residing there. Failure to register as an employer in an employee’s home state for withholding and unemployment can result in massive fines.

The Overtime Trap: The Department of Labor has finalized increases to the minimum salary threshold for exempt employees under the Fair Labor Standards Act, with the 2025 threshold. If your remote workers are misclassified or fall below this new threshold, they are non-exempt, and their exact working hours must be tracked and paid accordingly, complete with state-specific overtime rules

Hack #1: Implement Advanced Payroll Automation Tips

Manual tracking and legacy payroll systems cannot keep pace with 150+ evolving state and local tax formulas. The most effective hack is transitioning to a full-service, cloud-based payroll system built for multi-state compliance.

Geo-Fencing Time Tracking: Implement time tracking software that uses geo-location data to automatically track which state an employee is working in between states and ensures the correct state’s overtime rules are applied.

Automated Tax Remittance & Filing: Look for a solution that automatically calculates, withholds, and remits federal, FICA, and all relevant state and local taxes, including SUTA, based on the employee's residential and physical work address. 

Benefit and Deduction Sync: Use systems that integrate seamlessly with your retirement plans and state-mandated paid leave programs, automating the correct payroll deductions and reporting.

Bookkeeping Hacks: Achieving Real-Time Financial Control

While payroll ensures compliance with the government, effective bookkeeping and payroll services ensure financial health. In the remote era, traditional paper trails and delayed data entry are liabilities that mask the true state of your cash flow.

Hack #2: Cloud Accounting Solutions for Real-Time Accuracy

The bedrock of modern, secure, and accurate bookkeeping for a remote business is a robust cloud accounting solution. This isn't just software; it's a foundational workflow shift.

Automated Bank Feeds & Categorization: Connect all business bank accounts and credit cards directly to your cloud accounting platform. This automates the data entry process, minimizing human error and providing real-time transaction visibility.

Receipt Capture and Digital Audit Trails: Implement apps that integrate with your cloud solution, allowing remote employees to capture receipts instantly using their phone. This eliminates lost receipts, streamlines expense reports, and creates a secure, digital audit trail for every transaction.

The "Daily Huddle" for Books: Instead of waiting for a month-end crunch, remote bookkeeping requires a small, daily data review. A dedicated bookkeeper or automated rule set should review and categorize new transactions daily. 

Hack #3: Optimize Accounts Payable and Receivable for Remote Speed

Cash flow is the lifeblood of a small business. Remote work must not slow down your billing or payment cycles.

Digital AP Workflow: Transition to fully digital accounts payable systems. Tools like Bill.com allow you to manage vendor invoices, approvals, and payments entirely online. This eliminates the need to physically mail checks, speeding up payments and improving vendor relations.

Automated Invoicing & Collections: Leverage the power of your cloud accounting solutions to set up automated recurring invoices and payment reminders. Businesses that automate reminders reduce the time it takes to get paid by up to 25%. Integrate with online payment gateways to offer customers convenient, secure payment options directly from the digital invoice.

Finlotax: Automate Payroll & Strengthen Your Business

The challenge of the remote work era is clear. Trying to manage multi-state payroll compliance and modern, digital bookkeeping with outdated, manual processes is an untenable strategy that inevitably leads to a costly failure. By adopting intelligent payroll automation tips and essential bookkeeping hacks for small businesses utilizing robust cloud accounting solutions, you can transition your business from a compliance liability to a model of financial efficiency.

As companies expand their remote and hybrid workforces, payroll compliance has become a maze of state-by-state regulations. In 2025, multi-state payroll challenges are at the forefront of employer concerns, with tax jurisdictions evolving faster than ever.

Businesses must now navigate a wide range of state and local tax laws, manage location-based employee data, and stay compliant with income tax and unemployment insurance requirements across the U.S. This article breaks down the key issues and how to stay compliant in today’s dynamic work environment.

Why Multi-State Payroll Is a 2025 Priority

With employees working remotely from different locations, businesses can no longer afford to treat payroll as a one-size-fits-all process. In fact, even having a single employee in another state can create significant tax and reporting obligations.

What’s driving the complexity?

Hybrid work models: Employees are no longer confined to a single office.

State audits are increasing: States are cracking down on businesses that fail to properly register and remit taxes.

Changing legislation: State and local governments continue to adjust payroll-related laws to adapt to post-pandemic employment trends.

Key Payroll Tax Compliance Challenges in 2025

Let’s explore the most common pain points companies are facing this year when managing multi-state payroll:

1. Determining Where Payroll Taxes Are Owed

Payroll taxes are generally owed in the state where the employee physically performs their work. This creates challenges when:

Employees move between states

Teams are distributed nationwide

Temporary work assignments are common

Example: A software developer based in California temporarily relocates to Colorado for three months. The company must evaluate whether that triggers a payroll tax obligation in Colorado.

2. Tracking Employee Locations Accurately

To comply with state income tax and unemployment insurance rules, employers need to know where employees are working day-to-day.

Common issues:

Inaccurate employee address records

Lack of real-time location tracking

Employees failing to report changes

Solution: Implement tools that track and verify employee locations through GPS or self-reporting portals.

3. Managing State Income Tax Withholding

Each state has its own rules on how and when employers should withhold income taxes. Some states have no income tax, while others require withholding even if the employee works there only temporarily.

Residency matters: Some states tax based on residency, others on work location.

No reciprocity: Many states do not have reciprocal tax agreements with others.

Employers must understand the specifics of each state their employees work in—there’s no universal standard.

4. Understanding Unemployment Insurance Rules

Determining the correct state to pay State Unemployment Tax (SUTA) can be challenging, especially for remote workers.

Key considerations:

Primary work location

Where the employee receives supervision

Where business operations are managed

The U.S. Department of Labor provides a four-factor test to help determine the appropriate SUTA state—but interpretation can still vary by state.

5. Navigating Local and City-Level Payroll Taxes

In addition to state requirements, certain cities and municipalities levy local income or payroll taxes. Employers must track, calculate, and remit these taxes based on where employees live or work.

Cities with notable local tax laws:

New York City (NY)

Philadelphia (PA)

Denver (CO)

San Francisco (CA)

Pro tip: Don’t assume your payroll software automatically handles all local tax obligations—manual setup may be required.

How to Stay Compliant with Multi-State Payroll in 2025

Multi-state payroll compliance isn’t just about avoiding penalties—it’s about building a scalable, employee-friendly HR system. Here’s how to do it:

1. Audit Employee Locations Regularly

Create a process to verify employee addresses and work locations on a quarterly basis. Even temporary moves can affect payroll obligations.

2. Register with Tax Authorities in Every State

If you have a tax nexus in a state—meaning a business or employment presence—you’ll need to register for state income tax withholding and unemployment insurance there.

Tip: Keep copies of registration confirmations and filing credentials for each state.

3. Use Payroll Software Designed for Multi-State Compliance

Modern payroll platforms can manage multiple state tax rates, forms, and filing schedules. Choose a provider with:

Auto-updated tax tables

State-specific compliance tools

Built-in audit logs

4. Train Payroll and HR Teams on State Rules

Make sure your staff understands key concepts like:

Tax nexus

Reciprocity agreements

State-specific filing frequencies

SUTA guidelines

Knowledge is your first line of defense against non-compliance.

5. Partner with Legal and Tax Experts

Complex scenarios—such as employees working in multiple states simultaneously or working abroad—require expert guidance. Outsourcing tax research or consulting with multi-state tax professionals can save time and money.

Consequences of Non-Compliance

Failing to comply with multi-state payroll regulations can lead to serious consequences:

Fines and penalties for incorrect filings

Interest on unpaid taxes

State audits and back tax liabilities

Loss of employee trust due to payroll errors

In 2025, states are collaborating more than ever, sharing payroll data across jurisdictions to identify companies that haven’t registered or are under-reporting.

Looking Ahead: Payroll Trends Beyond 2025

As we look to the future, multi-state payroll compliance will likely become even more automated—but also more regulated. Employers should prepare for:

Real-time tax updates through integrated payroll APIs

Tighter audit controls using AI and cross-state data sharing

Greater employee control over tax withholding and location reporting

Companies that invest in compliance today will be better positioned to grow across borders tomorrow.

For more information about Payroll Tax 2025 visit here- Mastering 2025 Payroll Taxes: Key Changes & Best Practices

Conclusion

In a construction company, you have thousands of moving parts to keep track of at all times — literally and figuratively. 

Besides maintaining and tracking equipment, bidding, hiring, and managing job sites, construction payroll alone can give you plenty to navigate. Just look at state taxes! And as your business expands across state borders — or as you consider expanding across state borders — understanding how tax regulations can vary from state to state can be, well, taxing.

Your business relationship (or “nexus”) to state tax jurisdictions and the amount owed to them (or “apportionment”) is determined by the overlapping state, federal and other mandates. 

On the one hand, this can lead to contractors being out of compliance with payroll tax obligations — just as often, it can mean paying more than required to additional tax authorities. But don’t let that hold you back from taking on out-of-state jobs. 

The key to success is recognizing some of these common pitfalls and getting help from tax, legal, and construction payroll experts to ensure you’re navigating these issues correctly.

Staying Current is Rule #1

The first key to thriving with multi state payroll is to stay current. Working in two to four states on the same payroll is not unusual for many contractors. 

While winning jobs out of state is good, it can quickly complicate things. The most challenging aspect of working in multiple states is that each jurisdiction has different rules and regulations for payroll and taxes. 

Furthermore, none of them are written in stone, and they can change at any time. When considering the several states that hold potential projects for your company, staying current can be a serious undertaking.

As an example, regulations on recordkeeping can vary from state to state. While some states have no recordkeeping requirements, most require that employers retain records for a minimum of three years. 

Be sure to learn these requirements before you begin work in a new state — especially if your home state doesn’t have such requirements. 

Penalties and fines will also differ from state to state, including civil penalties, misdemeanor convictions, jail time, and fines from $100 to $10,000.

Additionally, some states hold reciprocity agreements with each other. Reciprocity between two states is an agreement allowing workers to pay taxes only to the state where they live. When this article was written, Ohio and Pennsylvania have a reciprocity agreement in which Ohio residents who work in Pennsylvania don’t have to pay Pennsylvania taxes. 

But these laws change. Pennsylvania and New Jersey had a reciprocity agreement that lasted almost 40 years but ended on January 1, 2017. Suddenly, companies and workers had to pay taxes to both states.

Steer Clear of Double Taxation

Besides keeping up with different regulations, double taxation can also arise. This occurs when an employee pays taxes twice on the same income — once for State A and once for State B, doubling the income tax they’re paying. 

Avoiding double taxation requires time and attention to detail. Employers must ensure that work is allocated to the correct state on timecards. Employees should carefully check paystubs to verify that their work is being reported to the state where the job was performed.

At tax time, the employee must file a resident state income tax return to report all income, including income earned out of state. They’ll also file a non-resident state income tax return to report only the income earned in that state. 

The resident state will typically give a tax credit for taxes paid on out-of-state work. As a result, the employee will pay taxes only once on their income.

Avoiding Overpayment in Unemployment

Along the same lines as double taxation, many contractors unknowingly pay unemployment insurance to the additional states in which they work while only needing to pay their base state. To determine where to pay unemployment insurance, four factors set by the U.S. Department of Labor should be considered.

1. Are the services localized? Localized means that the work is performed entirely in one state or that the work performed in additional states is incidental — meaning temporary. For example, a Florida worker receives a request to complete a job in Georgia. The job in Georgia is completed in a few months, and he returns to Florida on his original job. 

In this case, work is localized to Florida since the work in Georgia was temporary. When work is localized, state unemployment tax (SUTA or SUI) will be paid to that state. If not, consider the following factors.

2. Does a base of operations exist for the employee? When services aren’t localized in one state, determine if there’s a base of operations for that employee. A base of operations can be an office or a place where employees get instructions, receive or repair supplies and equipment, designate mail service, or manage and maintain business records. SUTA or SUI goes to the state where a base of operations is located.

3. Is there a place of direction or control? You might not have a base of operations, but if there’s a location from which you direct or control an employee, taxes for all work performed will be reported to that state.

4. What’s the employee’s state of residence? Consider the state where the employee resides if there’s no localization, no base of operations, and no center of direction or control.

Once these four factors have been considered, you should have narrowed down the state to which SUTA or SUI will be paid for that employee. 

Unemployment should typically be paid to only one state per employee. Again, it is always best to consult your payroll or legal expert to confirm your thought process and decision.

Take Time Now to Avoid Issues Later: A Few Best Practices

Much like many other aspects of business — and life — what can help avoid issues with state taxes is being prepared and detailed from the beginning.  Once a job is awarded, thoroughly research the state tax rules and regulations.

Additionally, the more detailed your timecards are, the better. This includes cost codes, trades, and hours worked, broken out by each job. It’s also extremely important to make sure you have job and employee records up to date at all times, especially home addresses. This takes more time upfront but will pay off greatly as you file taxes.

Finally, ensure you have numerous reports available and processes in place to review your payroll details before payroll is processed. Running timecards and proofing reports may help you catch mistakes and avoid issues in the future.

Work With A Company That Knows How To Handle Multi-State Taxes

Having reviewed a handful of multi-state tax issues here, we’ve only scratched the surface regarding working in multiple states. However, contractors don’t have to — and shouldn’t — go it alone. 

Taxation and legal counsel are irreplaceable. Construction-specific CPAs are a must-have for contractors of any size, and along with their professional guidance, a construction-specific payroll service can execute tax-compliant processing without headaches.