Everything You Need to Know About Compliantly Hiring Remote Workers

The last few years have completely changed the work landscape, leading more and more people to start working remotely. Today, roughly 28% of private American businesses have employees who work remotely either some or all of the time.

For foreign founders, one of the biggest advantages of incorporating in the US is being able to hire American employees. In this article, we’ll take a look at employment compliance rules to make sure you understand your obligations. After reading, you’ll be ready to hire the best candidates without worrying about their location.

TL;DR

• Classify correctly: employees vs. independent contractors; misclassification brings back wages, payroll taxes, and fines.
• Hiring out-of-state triggers foreign qualification and a local registered agent in each new state.
• Register for state payroll & unemployment taxes; adjust withholding to the employee’s location.
• Comply with a patchwork of state leave laws (FMLA baseline, paid family/sick leave, required notices).
• Maintain ongoing filings: annual reports and, where applicable, franchise taxes.
• Penalties for non-compliance can reach $1k/day, 40 % payroll tax, plus civil/criminal charges.
• Firstbase Agent automates foreign qualification, registered agent service, payroll registration, and deadline reminders for seamless remote hiring.

Employee vs Independent Contractor: How to Avoid Misclassification Penalties

Correct worker classification hinges on the degree of control you exercise over how, when, and where the work is done. The IRS “common-law” test looks at behavioral control, financial control, and the nature of the relationship, along with its 20 sub-factors. The U.S. Department of Labor applies a similar multifactor analysis under the Fair Labor Standards Act (FLSA).

Why it matters:

• Back wages & overtime: If a contractor is re-characterized as an employee, you may owe up to three years of unpaid minimum wage or overtime, plus an equal amount in liquidated damages.
• Payroll taxes & benefits: The IRS can seek the full employer share of FICA, income-tax withholding, FUTA, and interest, often 40 %+ of total pay.
• Civil money penalties: Willful FLSA violators face civil penalties of up to $1,000 per violation and, for repeat offenses, criminal fines or imprisonment.
• State-level risks: Illinois, for example, can levy $1,500 per day per misclassified worker, escalating for repeat violations. Massive settlements like a $9.3 million deal for 1,750 misclassified healthcare workers underscore the stakes.

How Does Remote Work Affect Compliance?

Startups and other small companies often hire employees who live in the same state where the business is headquartered.

For example, let’s say your business is incorporated in California, and all of your employees live in that state.

In that case, you only need to worry about taxes and regulations in California.

On the other hand, hiring remote employees from other states introduces new compliance issues for business owners to be aware of. Let's take a look at the key issues when hiring out-of-state employees.

How Do I hire a Remote Employee?

Step 1. File for foreign qualification

Before you can hire a remote employee in another state, you'll need to register your business to operate in that state. This process is called foreign qualification, and it typically goes through the state Secretary of State.

As a business owner, you need to file for foreign qualification in each state where your business expands. State laws vary on what constitutes expansion into their jurisdiction.

You don’t always need a foreign qualification for things like business meetings, joint ventures, and partnerships across state lines. However, most states mandate a foreign qualification for ongoing operations. Foreign qualification is generally required in these situations:

1. Hiring a remote employee
2. Purchasing property or a building
3. Opening a new office or other facility

Since every state has its own rules, you should check state-specific regulations if you're unsure about your obligations.

Given today’s remote work landscape, remote hiring is one of the most common reasons for foreign qualifications. You should get started on foreign qualification as soon as possible if you’re planning to hire a remote employee in a new state. Firstbase Agent takes care of the entire foreign qualification process for you, so you can expand with ease.

One tricky element of a foreign qualification is the registered agent requirement. Your registered agent is responsible for receiving legal notices, tax documents, and other mail on behalf of the business. You won’t be able to complete a foreign qualification for your company without appointing a registered agent in the target state.

Firstbase Agent provides instant access to registered agents in all 50 states. We'll file your foreign qualification and other critical compliance documents so that you can focus on building your business. We’ll even let you know when new deadlines are approaching so that you don’t risk late fees or other penalties.

Step 2: Payroll Tax Registration

Employees generally pay taxes in the state where they work, even if the business mostly operates in another location. Income tax and other taxes vary from one state to another. This means that you’ll need to adjust your tax withholding practices as you hire more employees who work in other states.

Furthermore, you may need to register with the state unemployment office depending on whether you meet the criteria in a particular state. Employers with full-time employees typically need to pay unemployment insurance in the states where those employees live.

Taxes and other regulations vary dramatically between states, which makes things tricky for expanding businesses. Failing to meet any single requirement could lead to significant penalties for non-compliance.

Our new Payroll Tax Registration feature can register your company and make sure you set up the right payroll accounts in new states. We’ll help you stay in compliance with state regulations so that you can focus on recruiting talent and growing your business.

Leave & Time-Off Compliance Across States (Sick, Family, Paid Leave)

Remote teams trigger a patchwork of federal and state entitlements:

• Federal baseline: The Family and Medical Leave Act guarantees up to 12 weeks of unpaid, job-protected leave for qualified employees.
• Paid family leave (PFL): Thirteen jurisdictions, including CA, NY, MA, CO, and WA, now mandate employer-funded or contribution-funded wage replacement, typically 12 weeks at 60-80 % of average wages. A federal “Safe Leave” proposal would let compliant states opt into a six-week national floor.
• Paid sick leave (PSL): More than 20 states and dozens of cities require accrual, commonly one hour per 30 hours worked, often with 40- to 72-hour annual caps. Some states prohibit “use it or lose it” policies; others forbid payout of unused time on separation.
• Notice & posting duties: States like Colorado require remote employers to distribute digital posters explaining leave rights.
  Interaction with disability & workers’ comp: Multi-state workers may also be covered by separate short-term disability or temporary disability insurance schemes (e.g., NJ, HI, PR).

Compliance checklist:

1. Remote address tracking: Benefits follow the employee’s primary work location, not HQ.
2. Unified leave policy: Build a “highest common denominator” policy so all remote staff receive the most generous entitlement that applies.
3. Payroll system mapping: Configure leave accrual buckets per state; many platforms automate this once you input location data.
4. Recordkeeping & I-9 synergy: Updated addresses ensure correct leave triggers and support remote I-9 re-verification when names or SSNs change.

Failing to honor state-specific leave rights can yield penalties equal to lost wages, interest, and statutory damages, plus attorney fees. A proactive, location-aware leave program keeps morale high and auditors away.

Ongoing Compliance Requirements

The initial setup outlined above is crucial for remote hiring. Unfortunately, compliance isn't a one-time task, but an ongoing requirement. Here are the two main tasks you'll need to take care of in order to avoid any compliance issues.

Annual Reports

Most states require registered businesses to file annual reports with up-to-date information about the company. Some states ask for them less frequently, but almost every state requires some form of reporting.

On top of that, each state has its own annual report requirements and due dates. Some states have one annual report due date for every business, while other states stagger deadlines based on the date each company was formed.

That’s a lot for anyone to keep track of on their own, let alone a small business founder. Again, Firstbase Agent comes with automatic annual report reminders so that you can easily keep an eye on upcoming filings.

Franchise Taxes

Additionally, Washington, D.C., and some other states charge franchise taxes to businesses that operate within their borders. Like annual reports, franchise taxes work differently and come with different deadlines in each of those jurisdictions.

You could face late fees, loss of good standing, and other serious consequences if you fail to file annual reports or pay the required franchise taxes. With Firstbase Agent, you’ll receive a notification whenever due dates are approaching. We can even pre-fill state compliance forms to help minimize time spent on paperwork.

Wrapping Up

Hiring remote employees might sound straightforward, but these key requirements are easy to overlook. When it comes to compliance, even a seemingly harmless mistake could set your business back in terms of time, money, and credibility.

Firstbase Agent enables end-to-end compliant remote hiring and helps companies manage ongoing compliance obligations for their entire workforce in every state of operation. Sign up for Agent today to foreign qualify, connect with registered agents, set up payroll accounts, and stay on top of your filing requirements in every state, all from one intuitive online dashboard.

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