Employee wants to move from California to Texas - what are the tax/legal implications?

I run a small software company incorporated in Delaware with 8 employees. We're based in California (where I live) and all employees currently work in CA.

One of our senior engineers just told me he wants to move to Texas in March. He wants to stay employed with us and work remotely from Austin. I told him that's fine in principle, but now I'm realizing I have no idea what the legal/tax implications are.

Questions:

• Do I need to register the company in Texas?
• Do I need to withhold Texas state income tax? (Wait, does Texas even have income tax?)
• Do I need Texas workers comp insurance?
• Does this trigger any other compliance requirements?
• Can he still be employed under California law or do Texas employment laws apply?

Our payroll is currently through Gusto but I'm not sure if they handle multi-state employees automatically or if I need to do something special.

Is this going to be a huge headache? Part of me wants to just tell him he can't move, but that seems harsh and probably bad for retention.

We went through this exact situation last year when one of our employees moved from New York to Colorado.

Here's what we had to do:

1. Register as a foreign entity in Colorado (cost about $100)
2. Get a Colorado unemployment insurance account
3. Get Colorado workers comp insurance
4. Update our payroll system to withhold Colorado state taxes
5. File Colorado state tax returns going forward

The good news: Gusto (and most payroll providers) handle this automatically once you tell them. They'll register you in the new state, set up withholding, handle unemployment insurance, etc.

The bad news: It's an ongoing compliance burden. You now have to file taxes in two states, maintain two workers comp policies, and comply with both states' employment laws.

Employment lawyer here. The good news is California to Texas is one of the easier state transitions because Texas is very employer-friendly compared to California.

Tax implications:

• Texas has no state income tax, so no withholding needed
• You'll still need to register for Texas unemployment insurance
• Employee will pay less in taxes overall (no state income tax), which is nice for them

Registration requirements:

• Yes, you need to register as a foreign entity in Texas (very easy, done online)
• You need a Texas registered agent (costs $50-100/year)
• You need Texas workers comp insurance

Employment law:

• Texas law will apply to this employee (not California law)
• Texas is at-will employment with fewer protections than CA
• No meal break requirements, no overtime for salaried exempt employees
• Much easier to terminate if needed

Important: You should update their employment contract to specify that Texas law applies. Also review any California-specific benefits or policies that may not apply to out-of-state employees.

This is super helpful, thank you!

Follow-up question: If Texas employment law applies to him, does that mean he loses California protections? For example:

• California requires us to pay out unused PTO when someone leaves - does that still apply?
• We have sick leave policies based on California law - do those change?
• What about if we have a California-compliant arbitration agreement - is that still valid?

I want to make sure I'm not inadvertently taking away benefits from him by letting him move.

Great question. Generally, Texas law will apply, but you can contractually agree to maintain certain California benefits. Here's how each issue typically works:

PTO payout: California requires payout of accrued vacation (not sick time). Texas does not. However, your company policy can still promise PTO payout - it just becomes a contract issue rather than a statutory requirement. I'd recommend keeping the same PTO payout policy company-wide for simplicity.

Sick leave: California requires paid sick leave. Texas does not require any. You can choose to provide sick leave as a company benefit (many employers do this) or grandfather this employee's existing accrued sick time.

Arbitration agreements: This gets tricky. California has specific requirements for arbitration agreements (like the employee must be able to pursue PAGA claims). Texas is more permissive. You'll likely want a new employment agreement with a Texas-law arbitration clause.

My recommendation: Draft an addendum to his employment agreement that:

1. Specifies Texas law applies
2. Explicitly states which benefits he retains (PTO payout, any protected California benefits)
3. Updates any provisions that conflict with Texas law
4. Addresses workers comp and choice of forum for disputes

On the payroll side, Gusto absolutely handles this. You'll need to:

1. Add Texas as a work location in your Gusto account
2. Update the employee's work location to Texas
3. Provide Texas unemployment insurance info (Gusto can register you)

Gusto will automatically:

• Stop withholding CA state income tax
• File unemployment insurance claims with Texas
• Update W-2 to show Texas wages

One thing to watch out for: The employee will need to update their address with you officially. Some employees try to keep their CA address "on paper" to avoid the hassle, but that's tax fraud and will cause problems during an audit.

As someone who moved from California to Nevada last year while staying with my employer, here's the employee perspective:

Make sure your employee knows they need to:

• Update their driver's license and voter registration in Texas within 30 days
• Register their car in Texas
• Establish Texas residency for tax purposes
• File a part-year resident return with California for the year they move

California is aggressive about claiming people are still residents for tax purposes. If your employee doesn't cleanly cut ties, California will try to tax them on their full income even after they move.

Also, as an employee, I appreciated that my company worked with me on the transition. It was a pain for them administratively but they supported my move, which made me way more loyal.

Update: I talked to our HR consultant and Gusto support. Turns out this is way easier than I thought.

Gusto's response: "We handle multi-state employees all the time. You'll need to authorize us to register you in Texas, and we'll take care of the rest. Setup fee is $200, then normal payroll processing."

So basically:

• $200 one-time setup fee to Gusto
• ~$100/year for Texas registered agent
• Some incremental cost for Texas workers comp
• Additional annual tax filing burden (but our accountant handles this)

Total cost is probably $500-800 per year ongoing. Totally worth it to keep a good employee happy.

I'm going to draft an employment agreement addendum using @LisaP_EmploymentLaw's suggestions and work with our lawyer to finalize it.

One more thing to consider for the future: If you're going to allow employees to work from any state, you should implement a remote work policy that addresses this proactively.

Things to include:

• Which states you're willing to hire/retain employees in (some startups exclude states with difficult compliance like New York, California, Massachusetts)
• Approval process for relocations
• Who pays for relocation-related costs (registered agent, compliance setup, etc.)
• Timeline for notifying company of moves (30 days advance notice)
• Whether salary will be adjusted based on location

Some companies use EOR (Employer of Record) services like Deel or Remote.com to avoid registering in every state. The employee is technically employed by the EOR, who handles all compliance, then contracts their services to you. More expensive but way less administrative burden.

Great suggestion on the remote work policy. I'm definitely going to draft one before this becomes a trend.

For anyone else in this situation: Turns out Texas is one of the easiest states to expand into (no income tax, employer-friendly laws, simple registration). California to Texas is probably best-case scenario for multi-state employment.

Total setup time from start to finish: about 2 weeks. Most of that was waiting for Texas to process our foreign entity registration. Gusto handled everything else automatically.

Thanks everyone for the help! This thread probably saved me from making several mistakes.