Payroll Tax Compliance Risks Rise for Remote Employers
Employers must reconcile worker locations with state tax rules to mitigate audit risks as year-end payroll reviews begin.
Updated on Oct. 21, 2026 in Remote Work
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State payroll audits are increasingly focusing on the intersection of remote work locations, compensation sourcing, and tax withholding compliance. As year-end reviews approach, employers with mobile workforces face heightened pressure to accurately reconcile payroll systems with varied state regulations.
Why it matters
State authorities are prioritizing payroll tax compliance, creating significant administrative burdens for companies managing complex, multi-state workforces. Incorrectly categorized income or mismatched work-location records can lead to audits and potential financial liabilities for businesses.
New York maintains a 14-day threshold for nonresident withholding, while employers must navigate municipal tax frameworks like Ohio’s Chapter 718. The total number of businesses currently under audit for payroll sourcing remains undisclosed by state tax authorities.
The players
California Supreme Court
The state's highest judicial body that established the ABC test for worker classification.
The details
Companies are leveraging travel-and-expense reports and office badge access logs to verify where employees perform their duties. Payroll systems must be configured to apply specific state-level logic, such as New York’s convenience-of-the-employer test or the workday fraction used for allocating stock compensation. Meanwhile, California utilizes the ABC test established under Labor Code Section 2775 to distinguish between employees and independent contractors, further complicating classification for remote staff.
Timeline
2018: California Supreme Court decided Dynamex Operations West, Inc.
Year-end: Employers perform payroll tax setups and employee record reviews
Market Landscape
Current audit strategies follow the precedent set by the 2018 Dynamex Operations West, Inc. decision. This shift marks a broader transition toward rigorous enforcement of the California ABC test under Labor Code Section 2775 for remote and contract workforces.
Operators should audit their current payroll configurations against the specific tax statutes of every state where they have remote employees. Ensure that expense records and digital badge access are aligned with reported payroll data before finalizing end-of-year tax filings.
The takeaway
The rise of mobile workforces necessitates a shift from passive payroll processing to active, location-based verification. Review internal policies regarding the documentation of remote work days to ensure consistency with state-specific allocation rules.
Further reading
For more on managing multi-state compliance, see the Remote Work section.
Source note: This article includes information reported by Thomson Reuters.
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