With a multi-state workforce, processing payroll can be a little trickier because you’ll have more rules to keep up with. It’s a bit like you’re putting a jigsaw puzzle together, incorporating each state’s unique payroll tax laws, overtime rules, labor regulations, income tax withholdings, insurance requirements, and business registration processes — whew
What you’ll learn
What you’ll learn
Updated: August 6, 2025
Key takeaways
- Multi-state payroll is more complex than single-state payroll, but payroll software can automate the entire process
- Your business must adhere to labor and tax laws in every state where you have employees
- Reciprocal agreements among some states will also impact tax withholding
So, how does an employer keep up with all the rules? if you have remote workers, traveling employees, or staff working in multiple jurisdictions, start with this guide to multi-state payroll tax compliance. We’ll cover key obligations for employers with workers in different states, how to stay compliant, and how to stay up to date on state labor laws.
What multi-state payroll means for employers
First things first, multi-state payroll involves paying employees who work or live in different states. By 2028, half of the world’s workforce is expected to be mobile, which means that businesses may want to start thinking about how to manage payroll and other tasks across state and international lines. Many remote employees appreciate the flexibility, which means they tend to stay longer — which can go a long way toward supporting your business goals.
In a nutshell, your business should be prepared to manage multi-state payroll compliance if it isn’t already.
How to meet employer registration requirements in multiple states
To avoid costly penalties and administrative roadblocks, you must take several key steps to meet employer registration requirements in multiple states.
Steps to register your business in new states
Here are the steps to take:
- Research state labor laws. You’ll want to understand each state’s requirements for business registration, minimum wage laws, tax obligations, and filing requirements.
- Register as a foreign entity. Your business may need to file for foreign qualification when doing business across state lines. You must file a Certificate of Authority with the state and pay a filing fee. This means you will likely need to pay taxes in every state where you have employees, and you will need to appoint a registered agent in each state.
- Establish payroll accounts. You must register for state tax withholding, unemployment insurance, and other required payroll taxes with each state’s tax agency.
Curious how many of your small business peers have employees in more than one state? OnPay’s survey found over 80% keep team members close to home. See the graph below and check out the full survey report with more SMB insights.
You must understand rules and regulations and how to do payroll accurately in every state where you have an employee — even if they are a freelancer or contractor. To avoid errors or penalties, you may consider working with a professional payroll provider or legal service that can help you navigate registration and compliance in multiple states
Moving on, let’s take a look at what needs to be taken care of as far as taxes go.
Handling state income tax withholding correctly
Your business must withhold the correct state income taxes based on employee residency and work location, which can require some legwork.
When handling state income tax withholding in multiple states, consider the following:
- Determine “nexus.” Nexus is the connection between your business and the state’s tax obligations. It can be established through physical presence, remote employees, and economic activity.
- Follow tax withholding rules in the states where employees work. As a general rule, state income tax withholding is based on where a team member works — even if they live in another state. Naturally, tax rates and rules vary by state, so you’ll want to take a closer look at obligations in every state where you have employees.
- Manage multi-state payroll. Multi-state payroll processing software can help you manage payroll across state lines with ease. It reduces manual work and errors and streamlines payroll, no matter where you’re doing business.
- Stay up to date. Make sure your organization regularly monitors any changes in state laws or reporting deadlines to maintain ongoing compliance.
These steps can help you stay in compliance, maintain accurate records, and support proper reporting for all of your team members.
How reciprocal agreements impact withholding
Reciprocity agreements involve agreements between certain states where residents of one state who work in another only pay taxes in their home state. However, these team members must file an exemption form with your business to avoid tax withholding in the state where they work.
For example, Arizona has reciprocity agreements with California, Indiana, Oregon, and Virginia, while North Dakota has reciprocal agreements with Minnesota and Montana. This can simplify tax prep and filing and prevent double taxation on the same employee income. It also reduces compliance costs for your business.
Did you know?
Though less than 20% of small businesses shared they currently have employees in more than one state, this doesn’t mean they have shut the door on the idea. Over 30% of SMBs in our 2025 survey said they have plans to grow their remote workforce.
Manage unemployment insurance obligations by state
As if taxes weren’t complicated enough, your business must also manage unemployment obligations between states. Every state manages its own unemployment insurance program.
These tips will help you manage unemployment insurance in multiple locations:
- Understand tax rates, coverage requirements, and eligibility requirements for unemployment benefits in every state where you have workers.
- Train your HR and payroll team on these obligations and policies, and maintain detailed records.
- Respond to all unemployment claims in a timely manner to avoid potential penalties.
- Regularly review state laws and regulations on unemployment insurance.
Again, a payroll professional can help you comply with different unemployment insurance requirements in each jurisdiction.
Accommodate remote workers and traveling employees
Your business must accommodate remote workers, contractors, and employees who travel to different states. In addition to managing business registration, tax withholding, and unemployment insurance, you also need to keep the following in mind:
- Comply with all state labor laws. This includes overtime regulations, minimum wage laws, leave policies, and more.
- Maintain accurate records. Accurate recordkeeping when it comes to payroll taxes is a must for your business.
- Make sure your payroll system is robust. Your payroll system should be able to manage multi-state compliance and calculations to avoid errors and issues.
Regular training and communication will also help you keep your HR team and employees updated on the latest rules and regulations.
Multi-state payroll management
“OnPay has made payroll easy for me, especially with employees in multiple states. I’m able to add a lot of employees for not a ton of money, which is great since my employees are all part-time. OnPay gives me the flexibility to do payroll the way I need to. I’m able to customize when I can do payroll and put in different pay rates for different tasks my employees do.”
— Sandra D'Arezzo, Hello Simplified, LLC
Common payroll pitfalls to avoid in multi-state processing
The most common payroll pitfalls that your business should avoid in multi-state processing are:
- Incorrect tax withholdings: You must correctly and accurately withhold local, state, and federal taxes to prevent costly penalties.
- Ignoring local regulations: In addition to state rules and regulations, you must also pay attention to any local or city laws where you have employees. Your state labor board or secretary of state can help you stay on top of this.
- Poor or inaccurate recordkeeping: If your payroll records are incomplete, you will struggle when it comes to tax reporting or during an audit.
It is critical to classify employees correctly, manage statewide obligations, and be consistent in communication and reporting.
Ensure smooth multi-state payroll with proactive planning
Multi-state payroll may require jumping through a few hoops, but it’s a small price for keeping talented employees who help your business grow. While tax variations and reciprocal agreements can get complicated, the right payroll provider makes it much simpler. As your team grows — wherever they are — we’re here to help with any payroll questions that come up!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.