One remote employee can put you in another state’s tax system
Nexus is three separate tests, not one. The reason remote work catches people is that the cheapest of the three to trigger is the one nobody is watching.
A practice hires one person who works from home in the next state. Or an owner moves and keeps running the business. Nothing about the work changed, and the company is now potentially inside another state’s tax system.
The reason this surprises people is not that the rules are obscure. It is that most explanations of them collapse three separate questions into one.
Three tests, not one
A state can assert the right to tax your income, to require you to collect its sales tax, and to require payroll registration and withholding for someone working there. Those are three different tests with three different triggers. You can have any one without the others.
Payroll is usually the first to bite and the least discussed. An employee performing work in a state generally brings the employer into that state’s withholding and unemployment insurance systems, and that turns on where the work is physically done rather than on how much revenue the state produces. Some states apply a day-count or wage threshold before nonresident withholding starts and some do not, so the answer is per state rather than general. What makes it the one that catches people is that it can be triggered by a single hire, with no sales into the state at all.
The case everyone cites decided something else
Ask about nexus and someone will mention South Dakota v. Wayfair. It is a real and important case, and it is a sales tax case. It held that a state may require sales tax collection without physical presence. It did not decide when a state may tax your net income.
Reasoning from Wayfair to an income tax filing obligation is the standard error in this area, and it is expensive in both directions: businesses file where they have no obligation, and skip states where they do.
Why a service business gets less protection than it expects
There is a federal statute that limits state income taxation, and it is narrower than its reputation. Public Law 86-272 protects a business whose only in-state activity is soliciting orders for tangible personal property, shipped from outside the state.
Tangible personal property. Not services. A professional practice selling services across state lines is outside that protection entirely. Whether routine internet activity costs a goods business the protection is being actively contested, so it is not a settled point to rely on either.
It does not stop at the entity
For an S corporation or a partnership, income sourced to a state generally flows through to the owners as income of that state. That can create nonresident filing obligations for owners who have never been there.
There are mechanisms for handling it, composite returns, nonresident withholding, and entity-level elections among them, and choosing between them is a decision rather than a default. That area of law has been moving, so it is confirmed at filing time rather than carried over from last year.
What to do about it
The question is answerable with facts you already have: where every person who works for you physically sits, where the clients are, and what the business is registered for. That is usually a short conversation and a determination, not a project.
Timing is the part worth acting on. Most states run a voluntary disclosure route that limits how far back they look and abates some penalty, and those programs generally close once the state contacts you first. A known exposure is cheapest in the year you notice it.
The mechanics, including how sourcing rules differ by state and how the credit for taxes paid to other states works, are set out on the multi-state taxation page.
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