Employee moved to Texas without telling me - now what? Payroll, tax, and compliance nightmare

We're a 15-person startup based in California. I just found out one of our engineers has been working from Texas for the past 4 months. He never told us he moved - just kept working remotely like normal.

Our payroll is still set up for California. Are we in trouble here? What do we need to do to fix this? I'm worried about tax issues, worker's comp, unemployment insurance, all of it.

He's saying he wants to stay in Texas permanently. Can we even allow that or do we need to make him move back?

Oh man, this happened to us last year. It's a mess but fixable.

You need to register as an employer in Texas immediately. That means getting a Texas unemployment insurance account, registering for workers comp, and updating your payroll withholding.

The 4 months of back taxes might be an issue. You'll probably need to file amended returns and pay penalties.

Employment attorney here. This situation is increasingly common with remote work, and yes, there are compliance issues you need to address immediately.

Key compliance requirements when an employee works from another state:

• Payroll tax withholding: Generally based on where the employee performs the work, not where the company is located. Texas has no state income tax, so that's simpler, but California may still have withholding obligations.
• Unemployment insurance (SUI): Must register with Texas Workforce Commission and pay Texas SUI tax
• Workers compensation: Must have coverage in Texas
• Wage and hour laws: Must comply with both California and Texas employment laws (generally the more protective applies)
• Registration: May need to register to do business in Texas

The California complication: California has unique rules. Even though he's in Texas, California may argue they still have jurisdiction over the employment relationship since you're a California employer. This is especially true for things like meal breaks, overtime calculations, and wage statements.

Wait, so we might still have to follow California employment law even though he's in Texas? That seems insane.

What happens with the 4 months where we were withholding California taxes but he wasn't actually in California? Is that going to be a huge penalty?

On California law applying: It's complicated. California courts have held that California employment laws can apply to California employers even for out-of-state employees in certain circumstances. See Sullivan v. Oracle Corp. However, this is fact-specific.

The safer approach: create a Texas-specific employment arrangement that complies with Texas law while being mindful of any California obligations that might still apply.

On the tax withholding issue: Your employee will need to file for a refund of California taxes withheld for the period he was in Texas. You'll need to issue corrected W-2s. There may be penalties for failure to withhold Texas unemployment taxes, but since Texas has no income tax, at least you don't have that issue.

Immediate steps you should take:

1. Contact your payroll provider TODAY and update his work location
2. Register with Texas Workforce Commission for unemployment insurance
3. Get Texas workers compensation coverage
4. Consult with a multi-state employment attorney about your broader compliance obligations
5. Consider whether you need to register as a foreign entity in Texas
6. Update your employee handbook to require pre-approval for out-of-state moves

I run payroll for a 50-person remote company. This happens more than you'd think.

Good news: Most payroll providers (Gusto, Rippling, ADP) can handle multi-state employees pretty easily once you tell them. They'll help with registration in the new state.

Bad news: The retroactive compliance is painful. You'll need to:

• File back SUI reports for Texas
• Pay back SUI taxes plus penalties
• Issue corrected W-2s
• Potentially deal with workers comp audit adjustments

Cost-wise, I'd budget $2k-$5k to clean this up between penalties, professional fees, and administrative work.

From an HR perspective, you should also consider:

• Employment agreement: Does his contract allow remote work from any state? You might need an amendment.
• Benefits: Your health insurance may not have network coverage in Texas. Check with your broker.
• Nexus issues: Having an employee in Texas might create corporate tax nexus requiring you to file Texas franchise tax returns.
• Policy going forward: Decide if you want to allow this. Many startups are creating "approved states" lists.

We had this happen and our solution was to require 30 days notice for any out-of-state move and approval from HR/legal. We also limit which states we'll support based on compliance complexity.

As someone who's done this (moved states while remote), I can say the employee probably had no idea they needed to tell you. Most people don't realize the compliance implications.

I'd be frustrated if my employer said I had to move back. If the work is getting done and you're remote-friendly anyway, why not just fix the compliance issues and let him stay?

@DigitalNomad_Dave raises a good point about employee expectations, but from a legal perspective, employers absolutely need to know and approve state changes.

@StartupCEO_Confused - Whether to allow him to stay is a business decision, but consider:

• Texas is relatively easy from a compliance standpoint (no income tax, employer-friendly laws)
• The setup cost is one-time, ongoing compliance isn't that burdensome
• Forcing him to move back could lead to resignation and potential discrimination claims

However, you should make it clear going forward that ANY location change requires advance notice and approval. Add this to your handbook immediately.

Also consider: if you allow this, other employees will ask. Do you want to support 10 different states? That's where the compliance really becomes expensive.

Don't forget the corporate income tax implications. Having an employee in Texas may create nexus requiring you to file Texas franchise tax returns and potentially pay Texas margin tax.

We went through this when we had employees in 8 states. Now we're dealing with 8 different state corporate tax filings. It's not the end of the world but it's real overhead.

Our solution: We created an "approved states" list of places with relatively simple compliance requirements. Texas made the cut, but we won't support employees in states like California (too complex) or states with high corporate taxes unless there's a business reason.

Thanks everyone. This is super helpful but also overwhelming.

I'm going to:

1. Call our payroll provider (we use Gusto) tomorrow and get Texas set up
2. Talk to an employment attorney about the retroactive compliance piece
3. Have HR draft a policy requiring pre-approval for any location changes
4. Let him stay in Texas (he's a great employee and I don't want to lose him)

One more question: do we need to update his employment agreement or is the payroll change enough?

Yes, you should absolutely update his employment agreement with a written amendment or new offer letter that:

• Specifies his primary work location is now Texas
• Confirms which state's laws govern the employment relationship
• Updates any location-specific provisions (paid leave, etc.)
• Requires notice and approval for any future location changes

This protects both of you and creates a clear record of when the change occurred, which will be helpful for tax authorities.

Good luck with the cleanup - it's messy but you're doing the right things!