Hiring someone who will work from home in another state makes you an employer in that state, even if that one person is your only tie to it. Expect to open an unemployment insurance account there, report the hire there, cover the employee under that state's workers' compensation rules and follow its wage and leave laws. State income tax withholding usually follows the employee too, but that is the one rule with real exceptions.
This guide is for a small U.S. business hiring a W-2 employee who will live and work full time in a state where the business has nobody else. It does not cover independent contractors, short business trips or employees outside the United States. Every rule below links to the agency that wrote it. We checked those pages on November 13, 2026.
- 20 days
- to report the new hire
- federal limit; some states allow less
- 3 business days
- to finish Form I-9, Section 2
- from the first day of work for pay
- 4
- states where workers' comp comes only from the state fund
- North Dakota, Ohio, Washington, Wyoming
Which state's rules apply?
The state where the work is physically done. The U.S. Department of Labor states the unemployment insurance rule this way: "In general, under state unemployment laws, workers' wages are reported to the state where the work is performed" (Unemployment Insurance Program Letter 20-04). Its own example is a remote worker. An employee of a New York company moves to Florida and keeps the job by telecommuting. The Department's conclusion: "her services are localized in Florida and subject to Florida law" (Attachment 1).
The same idea runs through most of what follows. Your home state's rules still govern your home-state staff. The new employee adds a second set of rules, and they apply to that one person.
Unemployment insurance: open an account in the employee's state
You pay state unemployment tax to the employee's state, on that state's wage base and at its rate for new employers. Each state sets its own point at which you must register. In Texas, an employer becomes liable once it "pays $1,500 or more in total gross wages in a calendar quarter" or "has at least one employee during twenty different weeks in a calendar year," and it must register "within ten days of becoming liable" (Texas Workforce Commission). A full-time hire passes a threshold like that within weeks, so register before the first payday.
Our payroll tax pages list every state's wage base and new-employer rate. Texas is one example.
State income tax withholding: usually the employee's state, not always
This is where the states part ways. Here are three official answers to the same situation, an out-of-state employer with one employee working from home in the state:
| State | What the state says | What it means for you |
|---|---|---|
| Colorado | An employer must withhold Colorado income tax from "all wages paid to any employee who is a Colorado resident" | Open a Colorado withholding account before the first payday |
| Pennsylvania | An employer "whose only connection to Pennsylvania is an employee who teleworks full-time from home in Pennsylvania is not required, but may, withhold" | Withholding is your choice. Either way the pay is Pennsylvania income to the employee |
| Michigan | "Employers have the option to voluntarily register" to withhold, "or the employee must make estimated income tax payments directly to Michigan" | Same choice. Tell the employee which one you picked, in writing |
Sources for the table: Colorado Department of Revenue, Withholding Tax Guide; Pennsylvania Department of Revenue, Telework Guidance; Michigan Department of Treasury, withholding tax FAQ.
Three more things to check before you set up payroll:
- States with no tax on wages. If the employee lives in one of them, there is no state income tax to withhold. Our list of states with no income tax names them.
- Reciprocity agreements. Some neighboring states agree not to tax each other's commuters. New Jersey, for instance, says "compensation paid to Pennsylvania residents employed in New Jersey is not subject to New Jersey Income Tax" (New Jersey Division of Taxation). These agreements are about people who live in one state and travel to work in another. An employee who lives and works in the same state is not that case.
- If your office is in New York. New York can keep taxing a remote employee's pay. Its tax department says that for "a nonresident whose primary office is in New York State, your days telecommuting are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location" (New York State Department of Taxation and Finance). That can mean withholding for New York and for the employee's home state at once.
When a state leaves the choice to you, withholding is usually the kinder option for the employee, because the alternative is quarterly estimated payments they have to make themselves. That part is our view, not a rule.
Workers' compensation: the coverage has to reach that state
Workers' compensation is state law, and a policy written for your home state does not automatically cover someone working elsewhere. Ask your insurer, before the first day, to add the employee's state to the policy and to confirm it in writing.
In four states an ordinary insurer cannot do that at all. Washington puts it plainly: "Washington State does not allow private workers' compensation coverage. You must purchase your coverage from L&I or be a certified self-insured employer" (Washington State Department of Labor & Industries). North Dakota, Ohio and Wyoming also run their own funds. Our workers' comp requirements by state shows each state's threshold and exemptions, and the Washington page explains how an account with L&I works.
The new hire report and Form I-9
New hire report. Federal law requires employers "to report basic information on new and rehired employees within 20 days of hire to the state where the new employees work," and "some states require it sooner" (Office of Child Support Services). Once you have employees in more than one state you get a second option: pick one state where you have employees and report every new hire there. That option requires registering with the U.S. Department of Health and Human Services as a multistate employer and filing electronically. Each state's deadline and filing address is on our new hire reporting pages.
Form I-9. The deadline does not move because the employee is remote. You or your authorized representative must complete Section 2 "within 3 business days of the date of hire," which means the first day of work for pay (USCIS). You have two ways to examine the documents of someone you will not meet:
- An authorized representative looks at the original documents in person, near the employee. USCIS says this "can be any person you designate," and adds: "You are liable for any violations in connection with the form or the verification process" committed by that person.
- Remote examination over live video, which is open only to employers enrolled in E-Verify in good standing (USCIS). The employee sends copies first and then shows the same documents on camera. If you offer this, USCIS allows offering it "for remote hires only," as long as it is not done for a discriminatory purpose.
Pay, leave and benefits follow the employee
The federal wage law does not shield an employer from a stricter state law. In its words, no provision of the Fair Labor Standards Act "shall excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under this chapter" (29 U.S.C. 218(a)). So look up the employee's state, not yours, for:
- the minimum wage, including any city rate;
- paid sick leave;
- required benefits, such as state disability or paid family leave contributions;
- how often you must pay.
Does one employee mean you are "doing business" there?
It can, and this is the part to settle before you make the offer.
Sources: California Franchise Tax Board, Help with doing business in California; Pennsylvania Department of Revenue, Telework Guidance.
California also has a numbers test. A business is doing business there if its California payroll exceeds a set amount or 25% of its total payroll. For 2025, the latest year listed when we checked, that amount is $75,707 (Franchise Tax Board). One well-paid employee can pass it alone.
An employee in a state can also be the physical presence that makes you collect that state's sales tax. Our sales tax nexus guide covers that test. Whether you must also register your LLC or corporation with the state's Secretary of State is a separate question that turns on each state's own law. We did not survey it for this guide.
The order to do it in
- Before the offerRead the employee's state
Its withholding rule, its workers' comp system, its minimum wage and leave laws, and whether one employee makes the business file taxes there.
- Before the first dayGet covered and registered
Workers' comp coverage that names the state. An unemployment insurance account. A withholding account where the state requires one or you choose to withhold.
- Within 3 business days of the first dayFinish Form I-9
Through an authorized representative, or by live video if you are enrolled in E-Verify.
- Within 20 days of hireFile the new hire report
With the employee's state. Some states give you less time.
- After the first quarter endsFile the state's wage report
And pay unemployment tax to the employee's state, not your own.
What this guide does not settle
- An employee who splits time between states. The Department of Labor applies further tests, in order: where the employee's base of operations is, where the work is directed from, and where the employee lives. Ask both states' unemployment agencies before you assume.
- City and county taxes. Some localities have their own wage taxes and leave laws. They are not covered here.
- Your own tax position. Whether a new state can tax the business depends on what the employee does there and on your entity type. That is a question for a CPA or tax attorney who knows that state, and it is worth one conversation before you hire.
Next steps
- Open the employee's state on our state pages and read its payroll, leave and insurance rules.
- Ask your workers' comp insurer to add the state. If it is North Dakota, Ohio, Washington or Wyoming, open an account with the state fund.
- Register for unemployment insurance, and for withholding if the state requires it or you choose it.
- Decide how you will handle Form I-9 before the first day, not on it.
- Put the new hire report on the calendar for the employee's state.
- Use the payroll cost calculator to see what the hire costs with that state's taxes.
- Payroll taxes by stateWage bases and new-employer rates
- New hire reporting by stateDeadlines and where to file
- Workers' comp by stateThresholds and state funds
- Minimum wage by state
- Paid sick leave by state
- Payroll setup checklistStep by step
Sources
All checked on November 13, 2026. Rules and dollar amounts change; the agency's own page is the authority.
- U.S. Department of Labor, Unemployment Insurance Program Letter No. 20-04 and Attachment 1, Localization of Work Provisions, May 10, 2004
- Texas Workforce Commission, Determine Whether You Need to Establish an Unemployment Tax Account
- Colorado Department of Revenue, Withholding Tax Guide
- Pennsylvania Department of Revenue, Telework Guidance
- Michigan Department of Treasury, Withholding Tax FAQ: out-of-state company with no nexus in Michigan
- New Jersey Division of Taxation, PA/NJ Reciprocal Income Tax Agreement
- New York State Department of Taxation and Finance, Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting
- Washington State Department of Labor & Industries, Do I Need a Workers' Comp Account?
- Office of Child Support Services, U.S. Department of Health and Human Services, New Hire Reporting
- U.S. Citizenship and Immigration Services, Completing Section 2, Employer Review and Attestation and Remote Examination of Documents
- Fair Labor Standards Act, 29 U.S.C. 218(a)
- California Franchise Tax Board, Doing business in California and Help with doing business in California
This guide is general information, not legal, tax or insurance advice.