However, the equation gets complex quickly when employees work in multiple states or enjoy hybrid arrangements. For those that split time between a home office in one state and a company site in another, employers may be obligated to withhold taxes in more than one state. Otherwise, they will likely be liable for penalties and back taxes.

Adding to the complexity, some states have reciprocity agreements that allow employers to withhold income tax only in the employee’s state of residence, even if work is performed elsewhere. These agreements vary by state and require documentation from the employee to apply. Employers should not assume reciprocity applies without confirming both eligibility and the necessary paperwork.

Related: Hybrid headaches, missing managers & salary concerns: Workforce insights

Every state has its own rules. There are those worth keeping an extra eye on, though, as they can be more complex or aggressive when it comes to enforcement. California, New York, Massachusetts, Maryland, and New Jersey have more stringent requirements. For example, they often expect prompt registration once an employee begins working within their borders, even if for a part-time position or a limited duration. Employers may need to address local tax nuances, unemployment insurance thresholds, and even city-level obligations. Missing these jurisdictional layers can result in penalties, late fees, and administrative challenges.

What HR and finance leaders should do now

Organizations should conduct a thorough review of their workforce structure, especially those that grew rapidly or shifted to remote work during the pandemic. We recommend that HR departments:

• Map the workforce by state: Understand where each employee is physically working—not just where they live or where your offices are located.
• Check withholding and unemployment obligations in each state: This includes verifying minimum employee thresholds and reimbursement method rules for nonprofits.
• Review reciprocity agreements: Determine whether any apply to your employees and ensure the required documentation is in place.
• Document everything: Maintain clear records of state-specific policies and employee work locations to demonstrate compliance in the event of an audit.

A strategic approach to compliance

Ensuring payroll tax compliance in a multi-state employment environment is about more than avoiding penalties. Employee trust and organizational integrity are also at stake. Delays or inaccuracies in state tax withholding create confusion for workers, which can be especially frustrating when tax season comes around.

For nonprofit organizations, the landscape includes additional layers. Some states exempt nonprofits with headcount below a certain threshold from paying into the unemployment system. Others offer the option to select the “reimbursement method,” where instead of contributing regularly to the unemployment trust fund, the nonprofit agrees to reimburse the state only if unemployment benefits are paid out.

This can be an appealing option for nonprofits with historically low turnover, but it also comes with risk. A single unexpected claim can create an outsized financial burden if the organization is unprepared.

Whether in commercial or nonprofit organizations, the modern workforce is more mobile than ever. Payroll compliance, however, is still a factor that must remain grounded in state-specific legal obligations. For HR and finance leaders navigating this environment, the key is to stay informed, stay organized, and stay ahead. With the right strategies in place, companies can support employee flexibility without compromising compliance.

Kelly Zack is a Partner at AAFCPAs, advising for-profit and nonprofit organizations on multi-state tax compliance, financial operations, and employment policy. She works closely with clients to assess risk and implement practical, strategic solutions that align with today’s evolving workforce landscape.