Remember the good old days when you knew exactly where your employees sat? Cubicles, coffee machines, and the occasional office birthday cake. Then 2020 hit, and the world flipped upside down. Now, your “office” might be a kitchen table in Boise, a beach house in Florida, or—honestly—a hammock somewhere in the mountains of Colorado. And while that flexibility is fantastic for work-life balance, it’s quietly created a tax headache that’s anything but relaxing.
Here’s the deal: remote work didn’t just change how we collaborate. It fundamentally scrambled the map for state and local tax nexus. Nexus, in plain English, is the level of connection a business has to a state that forces it to collect and remit sales tax (or pay income tax). For decades, nexus was physical—an office, a warehouse, a sales rep with a company car. But now? Your employee’s Wi-Fi router might be the very thing that triggers a tax obligation in a state you’ve never set foot in.
What Exactly Is Nexus in the Remote Work Era?
Let’s rewind a bit. Before the pandemic, the rule of thumb was simple: if you had a physical presence—a storefront, a distribution center, even a single employee working from a home office—you had nexus. That meant you had to register, collect sales tax, and file returns in that state. It was a pain, but at least it was predictable.
Then came Wayfair in 2018. The Supreme Court said states could tax remote sellers based on economic activity—sales thresholds, not just physical presence. That was a game-changer for e-commerce. But remote work? That’s a different beast. Now, we’re talking about employee presence creating nexus, even if your company has zero sales in that state.
Think of it like this: your employee is a tent stake. Wherever they pitch their home, your business tent is technically pitched too. And states are getting savvy to this. They’re looking at payroll records, worker’s comp filings, and even LinkedIn profiles to figure out where your “hidden” workforce lives.
The Two-Headed Monster: Sales Tax vs. Income Tax Nexus
Remote work doesn’t just mess with sales tax. It also pokes the corporate income tax bear. And honestly, that’s where things get really hairy. Let’s break it down.
Sales Tax Nexus: The Employee as Your Agent
Most states follow what’s called factor-presence nexus for sales tax. That means if your employee—even a remote one—is working from their living room, they’re considered your physical presence. Why? Because they’re conducting business activities on your behalf. They might be answering emails, making calls, or processing orders. That’s enough.
So, if you’re a SaaS company in Austin with a single customer success manager working remotely in Ohio, you likely have sales tax nexus in Ohio. You might need to register, collect tax on your software subscriptions, and file returns. Even if you have zero clients in Ohio. Yeah, it stings.
Corporate Income Tax: The Public Law 86-272 Lifeline (and Its Limits)
For income tax, there’s a federal shield called Public Law 86-272. It protects businesses from state income tax if their only activity in the state is soliciting orders for tangible goods. But here’s the catch—that law was written in 1959. It doesn’t cover services, SaaS, or digital products. And it definitely doesn’t cover employees who are doing more than just “soliciting.”
Let’s say your remote worker in New Jersey provides technical support. That’s not solicitation. That’s a service. Boom—you’ve lost your PL 86-272 protection. Now you’re looking at corporate income tax apportionment in New Jersey, based on where your payroll sits. And payroll follows the employee.
The “Convenience of the Employer” Rule: A Real Head-Scratcher
Now, here’s a twist that feels almost personal. Some states—like New York, Connecticut, and Pennsylvania—have a rule called convenience of the employer. It says that if you work remotely for your own convenience (not because your employer requires it), your income is still sourced to the state where your employer is located.
For example, imagine you live in Florida (no state income tax) but work remotely for a company headquartered in New York. Under this rule, New York can tax your income as if you were sitting in Manhattan. That’s not just a business problem—it’s a personal tax nightmare for your employee. And for you as the employer, it means you might be stuck withholding New York state taxes from a paycheck that’s earned in the Sunshine State.
It’s confusing, sure. But it’s also a clear signal: remote work has created a patchwork of rules that vary wildly from state to state. And that patchwork is getting more tangled by the day.
Recent Trends: States Are Cracking Down
In the early days of the pandemic, many states offered temporary relief. They said, “Hey, we won’t create nexus just because your employee is sheltering here.” But those grace periods are mostly over. States need revenue. And they’ve realized that remote workers are a goldmine.
Here’s a stat that might make you wince: Over 30 states now explicitly treat remote employees as creating nexus for sales tax purposes. And for income tax, the trend is moving toward “market-based sourcing” and stricter apportionment rules. What does that mean for you? More registrations, more filings, more compliance costs.
Let’s look at a few states that are leading the charge:
- California – They’ve always been aggressive. If your remote employee is in Cali, you’re in Cali. Period.
- Texas – No personal income tax, but they’ll nail you on franchise tax if you have payroll there.
- Massachusetts – They were one of the first to issue emergency rules during COVID, and they haven’t backed down.
- New York – The convenience rule is alive and well, and they audit aggressively.
And it’s not just the big states. Smaller states like Nebraska and Kansas are getting in on the action, too. They’re hungry for revenue, and remote work is the low-hanging fruit.
Practical Steps to Tame the Nexus Beast
Okay, so what do you actually do about this? You can’t just tell your employees to move back to the office—that ship has sailed for many companies. But you can get organized. Here’s a practical checklist that might save your sanity (and your tax bill).
- Track Employee Locations in Real-Time – Use HR software that monitors where people are actually working. Not where they said they’d be. Where they are.
- Review Your Nexus Thresholds – Each state has its own economic nexus rules (usually $100k in sales or 200 transactions). But employee presence is separate. Don’t mix the two.
- Register Voluntarily? Maybe Not. – Sometimes it’s better to wait until you’re sure you have nexus. But if you’re over the threshold, don’t delay. Penalties are brutal.
- Talk to a Multi-State Tax Pro – This isn’t a DIY project. You need someone who speaks “apportionment” fluently.
- Consider a “Remote Work Policy” – If you can limit which states your employees live in, do it. Some companies now say, “We only hire in these 10 states.” It’s restrictive, but it’s also predictable.
The Role of PEOs and Professional Employer Organizations
One workaround that’s gaining traction is using a PEO. A PEO becomes the co-employer of record for your remote staff. That means the PEO handles payroll, taxes, and compliance in each state. You still manage the work, but the tax headache shifts to the PEO’s shoulders. It’s not a silver bullet—you still have sales tax nexus if your employees are selling—but it can simplify income tax withholding and unemployment insurance.
That said, PEOs aren’t cheap. And they don’t eliminate nexus entirely. They just move the administrative burden. Worth considering, but not a cure-all.
What About Local Taxes? Yes, They Exist.
We’ve talked about states, but don’t forget the locals. Cities like New York City, Philadelphia, and even smaller municipalities have their own income tax rules. If your remote employee lives in a city with a local wage tax, you might be on the hook for withholding that, too. It’s a layer of complexity that feels like peeling an onion—except every layer makes you cry a little more.
For example, Philadelphia has a wage tax of nearly 3.8% for residents. If your employee moved there during the pandemic, you need to register with the city, withhold, and remit that tax. Miss a deadline? The city will find you. They’re surprisingly good at that.
The Future: Will There Be a Federal Solution?
There’s been chatter about a federal law to create uniformity—something like a national standard for remote work nexus. But don’t hold your breath. Congress has been debating this for years, and they’re not exactly known for speed. In the meantime, states are doing their own thing. Some are joining the Streamlined Sales Tax Agreement, which helps with uniformity, but it’s voluntary. And it doesn’t touch income tax.
So, what’s the realistic outlook? More complexity. More audits. And more need for businesses to be proactive rather than reactive. The days of “we’ll figure it out at tax time” are over. That approach will cost you dearly in penalties and interest.
Wrapping This Up (Without the Fluff)
Remote work is here to stay. And so is the tax complexity that comes with it. The businesses that thrive will be the ones that treat nexus tracking like they treat cybersecurity—an ongoing, essential part of operations, not a one-time fix. It’s not glamorous. It’s not fun. But it’s necessary.
Honestly, the most dangerous thing you can do right now is assume that your old nexus rules still apply. They don’t. The map has changed. Your employees have redrawn it with every move they’ve made. And the only way to stay safe is to look at that new map—closely, and with a good tax advisor by your side.
Because in the end