Navigating State and Local Tax Obligations for Fully Remote and Hybrid Workforces

Let’s be honest—the shift to remote and hybrid work felt like a liberation at first. No commute, more flexibility, better coffee. But that freedom comes with a tangled web of tax implications that can trip up even the most organized company. Suddenly, your employee in Phoenix is working from a cabin in Colorado for three months. Your star developer moved back to her hometown in Ohio. And just like that, your business might have a tax filing obligation in a state you’ve never set foot in.

Here’s the deal: the old rules were built for a world where people worked where the company was. Those rules are now, frankly, a bit of a mess. Navigating state and local tax obligations for a distributed team is like playing a multi-level chess game where the pieces keep moving. But don’t panic. We’re going to break it down.

The Core Challenge: Nexus and Withholding

Everything hinges on two concepts: nexus and withholding. Think of nexus as a “tax presence” trigger. It used to be a physical office or store. Now, an employee working from their kitchen table in another state can create “economic nexus” or “income tax nexus” for the company. That means your business could owe that state corporate taxes, and more critically, it has to withhold that employee’s state income taxes correctly.

Withholding is the practical headache. Employers are responsible for withholding the right amount of state (and sometimes city) income tax from each paycheck based on the employee’s work location. For a hybrid employee splitting time between a New York office and a New Jersey home, you need to track days and withhold for two states. It’s a logistical puzzle.

Where Do You Owe? The “Convenience of the Employer” Rule

This is where it gets really tricky. Most states use a “physical presence” rule for sourcing income—tax you where the work is physically done. But a handful of states, including New York and Delaware, have a notorious “convenience of the employer” rule.

If your company is based in New York and an employee lives and works remotely in, say, Texas for their own convenience, New York can still claim that income is taxable by them. The employee might owe New York taxes, not Texas taxes, even though they never set foot in New York. It’s a major pain point for remote workforce management and a rule that feels, well, deeply inconvenient.

Untangling the Hybrid Workweek

Hybrid arrangements are perhaps the most complex. You need a clear, documented policy. How many days in the office? How many at home? And where is “home”?

Best practice? Implement a system. This often involves:

• Formal telework agreements that specify the primary work location (the employee’s home address) and any secondary locations.
• Time-tracking procedures. Many companies use a simple self-certification system where employees report the days they worked in each state over a pay period.
• Regular payroll updates. Your payroll system must be agile enough to handle multi-state withholding changes frequently.

Without this, you’re guessing. And guessing with taxes leads to penalties, interest, and a lot of frustrated employees getting unexpected tax bills.

Local Taxes: The Final Layer of Complexity

Just when you think you’ve got states figured out, local taxes swoop in. Cities like New York City, Philadelphia, and Denver have their own local income taxes. Some counties have them too. An employee living in one town but working in another might have dual obligations.

For a fully remote employee, their local tax is typically based on their residence. But if your company has a physical office in a city with a local tax, and an employee occasionally goes in, you might need to withhold that city tax for those days worked there. It’s a dizzying patchwork of rules.

A Quick-Reference Table: Common Remote Work Scenarios

Scenario	Primary Tax Concern	Action Item
Employee permanently moves to a new state	Creates income tax nexus & withholding obligation in new state.	Register with new state’s tax agency, update payroll, inform old state if necessary.
Hybrid employee (office + home in different states)	Apportioning income & dual withholding requirements.	Track workdays per location; use reciprocal agreement if it exists.
“Digital nomad” working from multiple states temporarily	Could create “throwback” tax issues in home state and filing requirements in visited states.	Set a strict policy on work location mobility and time thresholds (e.g., 30-day rules).
Employee in a “convenience rule” state (e.g., lives in FL, works for NY firm)	NY may still tax 100% of income.	Understand the rule’s specifics; consider legal structure changes if scale warrants it.

Practical Steps to Stay Compliant

Okay, so it’s complicated. What can you actually do? Start with these steps.

1. Take inventory. Know where every single employee is physically working, down to the city. Audit this quarterly.
2. Understand state thresholds. Many states have a de minimis rule—like 30 days—before they impose withholding requirements. But not all. Map them out.
3. Review your payroll system. Can it handle multi-state, multi-local jurisdiction withholding seamlessly? If not, it’s upgrade time.
4. Communicate with employees. They need to know that moving or working from elsewhere has tax consequences for them and the company. Make reporting location changes a mandatory part of your HR policy.
5. Consult a professional. Seriously. State and local tax (SALT) is a specialized field. A good CPA or tax attorney can save you magnitudes more than they cost.

The Big Picture: It’s Not Just About Compliance

Managing these obligations isn’t just about avoiding penalties—though that’s a huge incentive. It’s about operational integrity and fairness. Getting withholding wrong means your employees face a surprise bill at tax time, which is a surefire way to destroy morale and trust.

And the landscape is still shifting. States are hungry for revenue and are actively reinterpreting old laws for this new world. What’s compliant today might be challenged tomorrow. Building a flexible, documented system isn’t a one-time project; it’s an ongoing part of your business infrastructure now.

In the end, the promise of remote work is autonomy. But that autonomy, ironically, requires more structure behind the scenes. It requires thinking of your workforce not as a single entity in one place, but as a collection of individuals in a geography that directly impacts your bottom line. The companies that thrive in this new normal will be the ones who don’t just see this as a tax problem, but as a fundamental rethinking of how work—and where work—gets done.