Summary of What This Blog Covers
- EORs can create state tax obligations like income, franchise, or sales tax, even if you’re not registered in that state.
- One remote employee may trigger nexus, especially in states like California or New York.
- EOR vs. PEO vs. in-house hiring impacts how and where you’re taxed.
- Proactive planning helps avoid penalties: quarterly nexus reviews and accurate bookkeeping are essential.
As the nature of work becomes increasingly flexible, remote teams are no longer a trend. They’re a strategic reality. Whether you’re scaling a tech startup, expanding your service business, or testing new markets, tapping into out-of-state talent can offer competitive advantages. But with opportunity comes responsibility, especially when it comes to taxes.
That’s where Employer-of-Record (EOR) services come in. An EOR can help you hire in any state without setting up a local legal entity. But—and this is where it gets complicated—just because an EOR is handling payroll and HR doesn’t mean you’re off the hook for state tax obligations. Hiring through an EOR can still create tax nexus, trigger income or franchise tax filings, and potentially bring sales tax requirements into play.
In this guide, we’ll break down EORs vs. PEOs vs. in-house hiring, clarify how state tax nexus works (with a spotlight on California), and provide real-world, strategic tax advice for business owners. If you’ve searched “tax professional near you” or “CPA firms in Austin, Texas” while trying to navigate this complexity, you’re not alone and you’re in the right place.
EOR, PEO, or In-House: What’s the Right Fit?
Let’s start with the fundamentals.
Employer-of-Record (EOR)
An Employer-of-Record is a third-party company that becomes the legal employer for your worker. Your company directs the work, manages projects, and drives business strategy, while the EOR handles the back-end:
- Payroll and wage compliance
- Tax withholding and reporting
- Benefits and HR support
- Workers’ compensation and unemployment claims
This structure enables rapid hiring across states—or even countries—without needing to register in each jurisdiction. It’s a favorite among fast-growing startups or U.S. companies hiring international talent.
Professional Employer Organization (PEO)
A Professional Employer Organization works under a co-employment model. Your company still employs the individual, but the PEO takes over administrative tasks such as:
- Payroll and tax filings
- Health insurance and benefits
- Risk and compliance services
However, to use a PEO, your company typically must be registered in the state where the employee resides, making it less flexible than an EOR for companies without existing presence.
In-House Employment
When you hire directly:
- Your business is the full legal employer.
- You handle taxes, compliance, payroll, benefits, and HR internally.
- You must register to do business in each state where employees work.
- You are responsible for meeting all federal and state employment laws.
While it provides the most control, this model requires more resources and often slows down expansion efforts.
At Insogna CPA, we guide clients through each model to determine which structure aligns best with their tax profile, workforce needs, and strategic goals.
The Real Impact of EORs on State Tax Nexus
Now for the part many business owners overlook: even if your EOR is the legal employer, your business may still be subject to state tax obligations. Here’s why.
Understanding State Tax Nexus
Nexus is a legal concept that establishes whether a business has a sufficient connection to a state to be subject to its taxes. There are two main types:
- Physical Nexus: Triggered by employees, offices, or property in the state.
- Economic Nexus: Based on revenue thresholds or transaction counts, regardless of physical presence.
The rise of remote work has blurred these lines. States are increasingly aggressive in asserting nexus even for companies without offices, simply because employees live or work there.
Case Example: EOR Employee in California
Say your business is based in Texas, but you use an EOR to hire a remote employee in California. Even though the EOR is the official employer on paper, California may consider your company as “doing business” in the state. That could mean:
- Filing a California income tax return
- Paying the California franchise tax (a minimum $800 annually)
- Collecting and remitting sales tax if you’re selling taxable goods or services
And this isn’t just a California issue. States like New York, Massachusetts, Illinois, and Washington have similar nexus policies.
Common Misconceptions About EORs and Tax Exposure
“My EOR handles all compliance, so I’m protected.”
While EORs do manage payroll, benefits, and employment law compliance, they do not insulate your company from state business taxes. States determine nexus based on where services are rendered and who benefits, not who cuts the paycheck.
“It’s only one employee in another state. No big deal.”
Many states have no minimum employee thresholds for nexus. One employee performing core functions in another state can absolutely trigger income tax or business registration requirements.
“My company is remote, we’re exempt.”
Remote-first doesn’t mean tax-free. If a state can demonstrate that your business benefits from services rendered within its borders, it may require you to file and pay taxes even without a brick-and-mortar presence.
What Taxes Could You Owe?
Working through an EOR can potentially trigger several types of state taxes:
- Income Tax Filing: Even if no income is owed, you may be required to file informational returns in states where you have nexus.
- Franchise or Gross Receipts Taxes: California and Delaware, for example, charge these taxes simply for doing business in the state.
- Sales Tax Nexus: If you sell products or taxable services in the state, you may need to collect and remit sales tax even with no physical presence.
- Local Taxes and Fees: Some cities (like San Francisco or New York City) have their own business tax layers.
Without a proactive strategy, you could face late filing penalties, audits, or back taxes stretching across multiple years.
Strategic Filing and Bookkeeping Recommendations
At Insogna CPA, we specialize in guiding small business owners and startups through multi-state complexity. Here’s how we advise clients who are using EORs:
1. Conduct a Nexus Assessment Every Quarter
Regularly review where your employees are located and whether any new tax thresholds have been triggered. Even just one remote employee or a surge in revenue in a new state could change your tax landscape.
2. Maintain Location and Payroll Logs
Keep detailed records of employee work locations, contracts, and payroll reports by state. These become critical during a nexus inquiry or state audit.
3. Sync Your EOR Data with Accounting Software
Integrate EOR reporting into your cloud-based accounting systems. This enables real-time tracking of expenses and better oversight of tax liabilities. It also gives your Austin tax accountant clear data for preparing filings.
4. Prepare for State Registration
If nexus is confirmed, register with that state’s tax authority as soon as possible. This includes obtaining:
- A state tax ID
- A business license (if required)
- A sales tax permit (if applicable)
5. Budget for Franchise Taxes and Compliance Fees
States like California, New York, and Texas assess minimum taxes or fees even if your business isn’t profitable in that state. Include these in your budgeting process.
How Insogna CPA Helps You Stay Ahead
Whether you need a CPA in Austin, Texas to help file your California tax return, or a tax preparer near you who can make sense of multi-state filings, Insogna CPA delivers a personalized, concierge experience rooted in advanced expertise.
Our firm supports clients with:
- EOR strategy and tax risk assessments
- Multi-state income and sales tax filing
- Entity structure optimization
- Quarterly tax planning sessions
- FBAR filing and international payroll support
From tax accountant near you searches to high-level CFO consulting, we combine traditional accounting excellence with forward-thinking insights designed to help you grow safely and confidently.
Client Success Story: Avoiding $24,000 in Penalties
A Texas-based software firm hired a developer through an EOR in New York. Initially, they believed the EOR shielded them from all local tax requirements. When we conducted their first nexus review, we discovered they had unknowingly triggered New York’s economic nexus rule six months earlier.
By immediately registering the business and backfiling necessary forms, we helped them avoid $24,000 in estimated penalties and interest. Today, we provide quarterly nexus audits and are guiding their expansion into three more states. This time, with a proactive strategy.
Your Next Step: Build with Confidence
An EOR is a powerful tool but it doesn’t eliminate your state tax responsibilities. The key is to know where you stand, what you owe, and how to stay ahead of shifting tax rules.
Whether you’re searching for tax preparation services near you, exploring Austin CPA firms, or just need clarity on where you stand with state taxes, Insogna CPA is ready to guide you with unmatched attention to detail and a proactive, strategic mindset.
Schedule a tax strategy session today with a certified CPA near you who understands remote teams, EOR partnerships, and the state tax rules that impact your business.
Visit InsognaCPA.com or call to speak with a senior tax advisor.
Because when you’re prepared, you’re free to grow.