Multi-State Payroll for Small Businesses: What You Need to Understand Before Hiring

Growing your business and hiring employees across state lines is a big milestone, but it can also open up a world of payroll compliance traps.
If you’re using QuickBooks Online and hiring in more than one state, this guide will help you understand what you need to register, how to stay compliant, and how to avoid unnecessary penalties.

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1. What “Multi-State Payroll” Really Means

When you pay employees who work in more than one state—whether they are remote, travel for work, or your business is expanding—you are responsible for payroll compliance in each of those states.

• Each state has its own salary withholding, unemployment insurance, and employer registration requirements.

• Even if your business is based in one state, you may need to register in another state simply because an employee works there.

• For example: If you have an employee living or working in Colorado but your business is in Kansas, you’ll likely need to register for payroll tax accounts in Colorado as well.

Key takeaway: In most cases, payroll taxes are based on where the employee performs work, not just where your business is located.

2. The 5 Essential Registrations to Complete Before Hiring

State Income Tax Withholding
You must withhold and remit state income tax where employees perform work. This usually applies the moment someone performs services in that state.

State Unemployment Insurance (SUI)
Employers must pay unemployment tax in each state where employees perform work. Register before running the first payroll.

Business Registration or Foreign Entity Filing
Some states require you to register as a “foreign” business to process payroll. This applies if your company has employees or clients in that state.

Local or City Tax Accounts
Certain cities or counties have their own local withholding or payroll taxes. Check if your employee’s city requires a separate account.

Reciprocity Agreements
Some states allow withholding only in the employee’s home state if a reciprocity agreement exists. Check state tax department websites before the first run.

3. Common Mistakes That Lead to Penalties

Here are the most frequent payroll errors small business owners make when expanding across states:

1. Running payroll in a new state before completing registration.

2. Assuming “state of residence” equals “state of tax.”

3. Not tracking where remote or traveling employees actually perform work.

4. Treating full-time remote employees as contractors to avoid registration.

5. Ignoring city or county payroll taxes.

Each of these can result in delayed filings, underpaid taxes, or state penalties that take time and money to fix later.

4. How to Stay Compliant Across States

1. Map out your footprint. List every state where your employees live or work.

2. Determine nexus and registration needs. Each state has its own definition of “doing business.”

3. Register early. Most states require registration before your first payroll run.

4. Track work locations carefully. For hybrid or remote workers, record which state they work from each pay period.

5. Use software that supports multiple states. QuickBooks Online Payroll can manage multi-state compliance once accounts are linked.

6. Keep your records organized. Maintain payroll tax filings, W-2s, and payment records for at least 4–6 years.

7. Get professional help when needed. Payroll experts can manage registrations and ongoing filings so you can focus on your business.

5. Why Working With a Payroll Specialist Saves Time and Stress

Handling multi-state payroll alone can become a full-time job. Between state registrations, local taxes, and filing deadlines, one missed step can lead to penalties.

When you outsource payroll setup and management, you can:

• Eliminate registration errors and missed filings.

• Ensure each employee’s taxes are withheld and remitted properly.

• Keep QuickBooks Online clean and accurate.

• Get peace of mind knowing you’re compliant in every state where you operate.

If you’re planning to hire across state lines or have remote employees, I can help get your QuickBooks Online payroll set up and running correctly from day one.

Ready for payroll that just works?

Expanding your team across states is an exciting step, but it’s also one that demands careful attention to payroll compliance. By registering in each state before hiring, tracking where work is performed, and using the right tools (or professional help), you’ll stay compliant and stress-free as your business grows.

About the Author

Dave Scroggs is a QuickBooks Online and Payroll Certified ProAdvisor who has been helping small businesses simplify their books and payroll since 2017. He works with clients across multiple states to ensure compliance and clean financial records.