Hiring in a new state: everything a startup has to register, and in what order

01What triggers it#

Four things commonly bring a company into a new state’s systems:

The first is the one startups miss, because nothing about it feels like expanding. The employee works from their kitchen; the state still sees an employer.

• An employee working from the state, full-time or part-time, including a remote hire who never visits the office.
• An office, a coworking membership, inventory or equipment kept in the state.
• Sales into the state above its economic nexus threshold, most often $100,000 in the current or prior year.
• Regular business activity in the state, under that state’s definition of “doing business.”

1. Foreign qualification#

A Delaware corporation is a “foreign” corporation everywhere else. A state can require it to register with the secretary of state (often called qualifying, or obtaining a certificate of authority) before it transacts business there. The filing generally needs a certificate of good standing from Delaware, a registered agent with an address in the state, and a fee; afterward the state usually charges an annual report fee and, in some states, a minimum franchise or income tax.

Whether one remote employee is “doing business” is defined state by state, and statutes list activities that don’t count, so the answer isn’t universal. The cost of getting it wrong is concrete, though: an unqualified company may be barred from suing in the state’s courts until it qualifies, and can owe back fees and penalties. Most startups with a full-time employee in a state qualify there. A lawyer or CPA should make the call for a state you’re unsure about.

2. Payroll: withholding, unemployment and new-hire reporting#

An employee in a new state means at least two payroll registrations. If the state has a personal income tax, you open a withholding account with its revenue department. Every state also runs an unemployment insurance program, so you open an employer account with its labor or employment department, which assigns a new-employer rate and a taxable wage base that differ by state. Your payroll provider can’t withhold or file correctly until it has both account numbers.

Federal law also requires you to report each new or rehired employee to the state’s directory of new hires within 20 days of the hire date, and some states require it sooner. Many payroll providers file these reports for you. Then there are the state programs that vary most: some states and cities have local income taxes, and a growing number run paid family and medical leave or disability insurance programs funded through payroll, each with its own registration.

Workers’ compensation insurance usually has to cover employees in each state where they work. Most states let you buy it privately (a policy that names the state), but a few, Washington among them, run the only insurer, and coverage comes through the state.

04A worked example: Washington#

A Delaware C-corp hires its first engineer in Seattle. Washington shows how the list changes by state:

The same hire in a state with an income tax would add a withholding account and drop the state-run workers’ compensation. Two states rarely share the same list.

• No withholding account: Washington has no personal income tax.
• Unemployment insurance with the Employment Security Department, which also runs Paid Family and Medical Leave premiums.
• Workers’ compensation through the Department of Labor & Industries, the state-run insurer, rather than a private policy.
• A state business license through the Business Licensing Service, which registers the company with the Department of Revenue and other agencies.
• Sales tax and B&O tax registration with the Department of Revenue once you have physical presence there, or more than $100,000 of gross receipts sourced to Washington in the current or prior year. Washington taxes many digital products and services that other states don’t.

3. Sales tax permit#

If the employee, an office or your sales into the state create nexus, and what you sell is taxable there, you register for a sales tax permit with the state’s revenue department before you start collecting. The state assigns a filing frequency, usually monthly, quarterly or annual depending on expected volume. Collecting tax without a permit is generally not allowed; collecting nothing after you should have been registered leaves the uncollected tax as yours.

If you crossed a threshold months ago without registering, most states offer a voluntary disclosure agreement, which limits the look-back and generally waives penalties if you come forward before the state contacts you. A CPA should handle that conversation.

4. Income and franchise tax#

Nexus for income tax is a separate question from sales tax, but an employee in the state is commonly enough. Once the company is taxable in more than one state, its income is apportioned among them by each state’s formula, and it may file a return in the new state even with no income, often with a minimum tax. A few states impose gross receipts taxes instead of, or alongside, income tax. This is the one that shows up a year later, at return time, so put it on the list now.

07The order of operations#

Do it in this order and the first paycheck is right:

• When the offer is signed: confirm the role is employment, not a contract, and get the employee’s home address.
• Before the start date: decide on foreign qualification and file it, since some agencies ask for your state entity number.
• Before the first payroll: open the withholding and unemployment accounts and any paid leave or local tax accounts, then add the state in your payroll provider.
• Within 20 days of the hire date, or sooner if the state requires: file the new-hire report.
• Before work begins: arrange workers’ compensation coverage for the state.
• At the same time: decide whether the hire creates sales tax nexus and, if so, register before collecting.
• In the chart of accounts: add the state’s payroll tax liability accounts and, if needed, a sales tax payable account, and calendar the state’s filing dates.