What should a small software company do when a remote employee moves to a new state?

Why one employee is enough

A person doing regular work for you inside a state is the classic form of physical presence. It does not matter that the employee sells nothing, that they are an engineer or a support specialist, or that they work from a spare bedroom. Most states treat an employee's ongoing in-state work as the company being present in the state. Sales volume is irrelevant to that test; there is no threshold to cross. Related: How to Know When You Are Approaching Nexus

For a software company, the twist is that presence may or may not translate into tax. If the state does not tax your product, the employee may create a registration and filing obligation, depending on the state, but little or no tax to collect. If the state does tax software subscriptions, you now have to collect from every customer there, starting from the employee's first day. Either way, the obligation to look exists the day the move happens, not when you get around to it.

Keep reading: Economic Nexus: A State by State Reality, How to Know When You Are Approaching Nexus, Registering in a New State, Step by Step. See how ShopTaxie helps you sales tax nexus tracking and filing reminders.

The first thirty days

Step one: confirm the date the employee started working from the new state and whether the move is permanent. Step two: determine whether the state taxes your product category, which for a software company can mean separate answers for subscriptions, downloadable components, support, and training. Step three: check whether you already had economic nexus there. If you did, the employee changes nothing for sales tax, though it may still change payroll and income tax. Related: Economic Nexus: A State by State Reality

Step four: if the product is taxable and you were not already registered, register for sales tax with an effective date matching the employee's start date. Step five: update your billing system so customers in that state are charged tax on invoices dated after that effective date. Do not try to collect retroactively from customers for the gap; that tax comes out of your margin, and chasing customers for it damages relationships for small amounts. Related: Registering in a New State, Step by Step

Beyond sales tax: the other obligations

The same relocation often triggers payroll withholding registration, state unemployment insurance, and possibly a corporate income or franchise tax filing. Some states require foreign qualification or a business registration once you have an employee there. Each of these has its own deadline and its own penalty schedule, and they tend to be discovered late because no single person owns them in a small company.

The practical fix is a written new-state checklist that lists every obligation, sales tax included, and a rule that it runs every time someone relocates or is hired remotely. Ask employees to tell HR before a move, not after. The cost of being early is filling out a form you might not have needed. The cost of being late is back tax, interest, and an unpleasant letter from a state you did not know you were doing business in. Related: Multi State Selling Without the Panic

Deciding whether to allow it at all

Some small companies restrict hiring and relocation to states where they are already registered, or to states where the added obligations are minor. That is a legitimate business decision. Others accept the cost of a new state as part of hiring the right person. Neither approach is wrong, but the choice should be made knowingly, with a rough estimate of the added recurring work rather than a shrug.

If you accept it, budget the ongoing effort: one more sales tax return per period if the product is taxable there, one more payroll registration, and one more state to watch for rule changes. Record the employee's work state in your nexus tracker alongside sales data so the trigger is visible in the same place you check thresholds. A nexus trigger that lives only in HR files is a nexus trigger nobody sees.