Multistate Payroll Processing: A Guide for HR

If your company has a remote or distributed team, there’s a good chance you’re facing payroll compliance challenges you might not even realize. Multistate payroll creates a sticky web of compliance across different legal jurisdictions. Navigating this web requires employers to remain organized, agile, and proactive. Below, we explore what payroll teams and HR professionals need to know.

{{rich-takeaway}}

Getting multistate payroll right matters. Here’s why. 

Multistate payroll involves managing wages, taxes, and benefits for employees working across different state jurisdictions. This once-niche challenge has become mainstream since flexible work transformed the American workplace.

Companies often become multistate entities, sometimes without even knowing it.

Previously, companies typically only registered in states where they maintained physical operations, like offices or warehouses. The shift to remote work changed this dramatically, with many employees relocating while keeping their jobs — a 2022 survey by Upwork found that 4.9 million Americans relocated between 2020 and 2022 due to the flexibility of remote work. This created new compliance obligations through what’s known as “tax nexus.”

Understanding Tax Nexus

Tax nexus determines when a business has sufficient connection to a state to trigger tax responsibilities. While requirements vary by state, some jurisdictions establish nexus with just a single resident employee, while others use payroll thresholds.

The Multistate Tax Commission (MTC) provides standardized guidelines that suggest nexus is established in a state when a business exceeds any of these thresholds there:

• $50,000 of property
• $50,000 of payroll
• $500,000 of sales
• 25% of total property, payroll, or sales

Once nexus is established, companies must formalize their relationship through state registration and comply with requirements like state unemployment insurance taxes.

Intensifying these challenges is the fact that sometimes employees move without first alerting their employer. “Companies often become multistate entities, sometimes without even knowing it,” explained Angela Schmitt, founder and CEO of A.S.K. Talent Solutions.

It’s not just payroll taxes.

While taxes often take center stage in multistate payroll compliance discussions, HR teams face a much broader set of obligations when employees work across state lines. 

Benefits Administration Across State Lines

Companies must ensure their health insurance and other benefit plans provide coverage in new states where employees relocate. This may require amending existing contracts or securing additional coverage to maintain consistent benefits for the entire workforce. 

State-Specific Employment Laws 

Each state maintains distinct employment regulations that can significantly impact payroll operations. “Massachusetts, for example, has a paid family leave law where both the employer and the employee pay in,” Schmitt noted. These state-mandated programs require employers to handle additional withholdings and comply with these contribution requirements.

{{rich-highlight-3}}

Policy Updates and Manager Training 

Employee handbooks and company policies must account for varying state requirements. “Some states now have reasons why people are permitted to have absences for work,” Schmitt explained. “You have to be careful that your absenteeism policy in your handbook is compliant with these rules and that you train managers so they don’t penalize someone for using time that’s permitted by state law.”

This policy complexity extends beyond time-off regulations to include wage and hour laws, break requirements, and other workplace protections that vary significantly from state to state.

Core Compliance Considerations

Once a state-specific obligation is triggered, employers are responsible for ensuring they are compliant with a number of requirements across multiple jurisdictions. Here’s what to keep in mind:

State registration: You must register with the relevant state tax agency to ensure you’re complying with requirements like state income tax withholding and unemployment insurance. “A lot of payroll providers offer this as a service, but at the end of the day, it’s HR’s responsibility to make sure the registration is done correctly,” said Yekaterina Weaklim, interim HR consultant at Korn Ferry.

Local payroll registration: Tax compliance obligations don’t end with the state tax authority. In many states, businesses are required to register at various municipal levels, including county, city, or town. “This is where it really gets tricky. Not only do you have to comply with state income tax requirements but the local ones, too, and these laws are often changing,” Weaklim said. 

Timeline challenges: State registration can take months to complete, which means employees continue paying taxes in their former state while waiting for approval. This then requires complex “later original filings” to correct the tax allocation once the new registration becomes active, said Weaklim. “This waiting period can be a huge challenge,” she added. 

Ongoing obligations: Reporting requirements and remittance schedules vary by state, as do final paycheck laws. HR teams must be sure to not only correctly handle the initial state requirements but also remain compliant with other ongoing obligations that come with being a multistate employer. 

Reciprocity agreements: Common in places where people often live in one jurisdiction and work in another, like in Maryland, Virginia, and Washington, DC, reciprocity agreements prevent double taxation by allowing employees to pay state income taxes only in the state where they live. 

The following state reciprocity chart comes from Thomson Reuters’ State-by-State Reciprocity Agreements article.

Managing Employee Relocations and Remote Work Complexities 

Life happens, and employees move — especially when you’re managing a remote workforce. While these relocations are a natural part of life, they create compliance challenges that demand careful planning and attention. Here’s what HR teams need to know to ensure employee moves go smoothly while staying compliant. 

1. Get as much lead time as possible.

Put cascading processes in place that help you get as much lead time as possible. “You want a process in place that allows you to administer your change forms quickly and easily. For example, when a manager submits a change request online, it triggers all of the other requirements,” said Schmitt. Ideally, your payroll solution can support this. “Hopefully you have a payroll system in place that would flag this for you and offer next steps, like notifying you if this is a state where you need these setups [in terms of registration],” she added. 

2. Know about the convenience of the employer rule. 

As of 2025, eight states (Alabama, Connecticut, Delaware, Nebraska, New Jersey, New York, Oregon, and Pennsylvania) enforce the “convenience of the employer rule.” This rule subjects remote employees to their employer’s state income taxes in addition to those of their state of residence. The main exception to the convenience of the employer rule is if employees are required by their employer to work in another state. 

Noncompliance fees add up very quickly and can easily reach hundreds of thousands of dollars.

Convenience of the employer rules can also differ slightly by state. For example, in Oregon, the rule only applies to nonresident managers. Be sure to double-check each state’s specific regulations. 

3. Be aware of registration delays. 

State registrations can take months to process, forcing employers to navigate complex correction procedures. “This is referred to as a ‘later original filing,’” said Weaklim. Once registration goes through, HR must “look at all of their wages, taxes, every single earning and deduction. You must back them out of their previous state, and you pay them out to the correct state,” said Weaklim. 

4. Consider assuming any liability. 

You may end up in a situation where an employee owes additional state or local taxes because of a delay in registration. If that’s the case, Weaklim said a focus on the human element of these transitions should be top of mind.

“I think it’s best to just cover the tax liability. It’s usually not big, and you don’t want to punish someone because they move somewhere, which the employer approved, and the state took forever to establish them,” she said. “These are the kind of choices that don’t cost much but pay dividends in terms of the employee experience.”

5. Train managers and communicate. 

Open and regular communication with managers to keep HR in the loop is important. Ideally, an HR person would be part of the conversation from the beginning to help streamline new state registration and other compliance matters, but that’s not always the case.

“Sometimes business leaders are more concerned with the work aspect, and if they’re comfortable with it, they’ll say, ‘Go ahead and move, and we’ll keep you on board. There’s no reason to involve HR,’” said Schmitt. To minimize this, train managers on pulling in HR as soon as possible and before giving approval for relocations. 

Common Challenges and How to Overcome Them 

Even experienced HR teams encounter significant pitfalls when managing multistate payroll, with financial consequences that can be severe. “Noncompliance fees add up very quickly and can easily reach hundreds of thousands of dollars,” said Weaklim.

Managing Different Tax Filing Deadlines and Forms

Multistate payroll tax filing for organizations with distributed teams is complex. Each jurisdiction maintains different filing deadlines, forms, and calculation methods, and penalties for errors or delays can reach substantial amounts. These challenges intensify for HR teams when tracking which specific taxes apply to each employee based on their work location and state of residence. 

Opt for a payroll provider that automates filing schedules and maintains current forms for all jurisdictions where you operate.

Staying Up to Date With Constantly Evolving State and Local Laws

States have their own distinct laws on payroll taxes, wage requirements, final paycheck regulations, and more. Companies that fail to stay up to date with the most current iterations of laws risk noncompliance fines and other penalties. 

Select a payroll provider that automatically updates withholding and remittance schedules to comply with the most current versions of state and local laws. 

Handling Employees Who Move Mid-Year or Split Time Between Locations

Employee relocations during the tax year create immediate compliance challenges requiring careful coordination. When employees work temporarily in different states or relocate permanently, HR teams must navigate complex tax allocation rules, determine which state laws apply, and often process retroactive corrections.

Establish clear protocols for employee notification of address changes and work location shifts, and select a payroll solution that makes it easy to track hours by jurisdiction and that maintains detailed documentation for audit purposes.

{{rich-highlight-2}}

How Lattice Payroll Can Help

The recommendations and resources shared here are great places to start, but HR teams still need tactical support when it comes to managing remaining compliance across state lines. That’s where Lattice comes in. Lattice Payroll automatically calculates taxes and withholdings, files taxes on your behalf, and gives you all the data you need for reporting and auditing.

Since we’re natively integrated with Lattice HRIS, you’ll get real-time updates on whether employees change addresses and ensure you always have their most recent address on file. Our built-in support for state-specific filings and compliance updates ensures you meet all the relevant state and local requirements — or get alerted otherwise. 

Success in Multistate Payroll 

Multistate payroll management is no longer just a concern for large corporations. Today, it’s an everyday reality for businesses of all sizes. 

Companies need to approach multistate payroll and compliance strategically, rather than reactively, as the complexity of managing employees across multiple jurisdictions touches every aspect of HR. Remaining compliant requires not only having the right processes in place but also partnering with a payroll provider that helps your team thrive across state lines. 

Schedule a demo to see how Lattice Payroll can streamline your multistate compliance and reduce administrative burden.

{{rich-highlight-1}}