Setting Up Payroll for Your First Remote Employee as a Small Business Owner
7 min read · Updated September 2026
Most of this site is written for the remote worker's side of the equation, but a meaningful share of small business owners hiring their first remote employee are asking the mirror-image question: what obligations does hiring someone in a state where the company has never operated actually create? The short answer is: more than most first-time employers expect.
Why Hiring One Remote Employee Can Create Tax Obligations in a State You've Never Operated In
A single remote employee working from their home in a state is often enough, on its own, to establish "nexus" — a legal connection significant enough that the state can require your business to register, withhold state income tax, and potentially pay state unemployment insurance and other employer taxes tied to that state specifically. This surprises many small business owners who assume nexus requires an office or a large workforce; in most states, it doesn't. One employee is enough.
Registering for Payroll Tax Withholding in the Employee's State
Before the first paycheck, you generally need to register with the state's department of revenue for income tax withholding purposes (assuming the state has an income tax — see our list of no-income-tax states if the employee is based in one of the nine that don't). This is a separate registration from anything you've already done in your home state, even if you're using the same payroll withholding categories conceptually.
Workers' Compensation and Unemployment Insurance Registration
Nearly every state requires workers' compensation coverage for employees, including remote ones, and the coverage generally needs to come from a policy either licensed in that state or from a national carrier that can extend coverage there — a policy written only for your home state typically doesn't automatically cover an employee working from a different one. State unemployment insurance (SUTA) registration follows a similar pattern: you generally register and pay SUTA tax in the state where the employee actually performs the work, not your company's home state.
Withholding Correctly From Day One
| Step | What It Involves |
|---|---|
| State income tax withholding registration | Register with the employee's state department of revenue before the first paycheck |
| State unemployment insurance (SUTA) | Register in the employee's work-location state; rates vary by state and by your claims history |
| Workers' compensation | Confirm your policy extends to the employee's state or obtain separate coverage |
| Local/city tax withholding | Check for local income taxes in the employee's specific city or county — several major cities levy these independently of state tax |
Should You Use a PEO or Payroll Service Instead of DIY?
For a business hiring its first out-of-state remote employee, a Professional Employer Organization (PEO) or a payroll service with built-in multi-state compliance support handles most of this registration and ongoing filing automatically, for a fee — often a worthwhile tradeoff against the time and error risk of managing multi-state registration manually, especially if you expect to hire in additional states over time rather than this being a one-off situation confined to a single state.
International Remote Employees: A Different Problem Entirely
Everything above assumes hiring a remote employee within the United States. Hiring someone based in another country is a fundamentally different undertaking — most small businesses can't legally run direct payroll for a worker in a foreign country without establishing a local entity, which is rarely practical for a first international hire. The standard solution is an Employer of Record (EOR) service, which legally employs the worker on your behalf in their home country, handles local payroll, tax withholding, and benefits compliance, and invoices your business — letting you direct the person's day-to-day work without taking on the legal and tax registration burden of becoming an employer in a country where you have no other presence.
Why Some Businesses Avoid This Entirely by Hiring 1099 Instead
Given the real complexity above, it's tempting for a small business to sidestep multi-state payroll registration entirely by classifying the new hire as a 1099 contractor instead of a W-2 employee — but this decision has to be driven by the actual nature of the working relationship, not by which classification is more administratively convenient. As covered in our guide to contractor misclassification red flags, a company that directs someone's schedule, provides their equipment, and integrates them into the team the way an employee would be integrated is exposed to real misclassification risk regardless of how the relationship is labeled on paper, and the administrative savings from avoiding payroll registration can be dwarfed by the back-tax and penalty exposure if a state or the IRS later determines the worker was misclassified.
Frequently Asked Questions
Do I need to register in a new state for just one remote employee?+
In most states, yes — nexus for payroll tax and employer registration purposes is generally triggered by having even a single employee physically working there, regardless of your company's overall size or whether you have any other presence in that state.
What happens if I don't register and just pay the remote employee normally through my existing payroll system?+
This typically results in incorrect state tax withholding and can expose the business to back taxes, penalties, and interest once the state identifies the unregistered employer — which state revenue departments increasingly do through cross-referencing employee tax filings against registered employer records.
How long does state payroll tax registration usually take?+
It varies by state, but many process online registration within a few business days to a couple of weeks — starting the registration as soon as an offer is accepted, rather than waiting until the employee's first pay date, avoids a last-minute scramble to get withholding set up correctly.
This article is educational only and is not tax, legal, or financial advice.
Model this scenario yourself
Plug your own gross salary, state, and W-2/1099 status into the free calculator to see your exact take-home number.
Open the Salary Calculator →