ARTICLE | September 24, 2026

Payroll systems rely on employee locations, tax codes, registrations, and other information provided by the business. As employees move, work remotely, travel across state lines, or transfer between entities, those settings can fall out of step with the company’s actual workforce.

The result may be missed withholding, unemployment insurance, paid leave, local tax, or filing obligations. A periodic review of where employees actually work—and where payroll is reporting them—can help identify exposure before it leads to assessments, corrected tax forms, employee frustration, or transaction-related concerns.

Payroll Can Run Correctly and Still Tell the Wrong Story

A successful payroll run does not necessarily mean every state and local tax obligation has been addressed.

Payroll providers generally process the information they receive. When an employee’s location, tax setup, or assigned work state is incorrect, the system may continue calculating and reporting taxes exactly as configured—even when the configuration no longer reflects reality.

Most reporting gaps do not begin with one major mistake. They begin with routine business changes:

• An employee relocates without updating their information.
• A remote employee is hired in a new state.
• An employee begins traveling regularly to customer or project locations.
• Employees transfer between related companies.
• A business completes an acquisition or reorganization.
• The company changes payroll providers.
• A state account remains open after the company no longer has employees there.

Individually, these changes may seem minor. Over several employees, jurisdictions, and years, however, they can create a payroll tax footprint that looks very different from the way the business actually operates.

Where Payroll Reporting Gaps Tend to Surface

A location error can affect more than one type of payroll tax. Employers should consider the full reporting picture rather than focusing only on state income tax withholding.

State income tax withholding

In many situations, withholding is connected to where an employee performs services—not simply where the company is headquartered or where the employee appears in the payroll system.

Reciprocity agreements, temporary-work rules, and other exceptions may apply, but those provisions must be evaluated and implemented correctly. A payroll code does not determine the underlying tax obligation.

State unemployment insurance

Unemployment wages are generally assigned to one state under rules that consider where the employee works, where the work is directed, and where the employee is based.

Reporting wages to the wrong state does not necessarily resolve the obligation in the correct state. The issue may not become visible until an employee files an unemployment claim and the state cannot locate the expected wage history.

Local payroll and income taxes

Some cities, counties, and other local jurisdictions impose their own payroll-related taxes or withholding requirements. These rules can be especially difficult to manage when an employee works in several locations or when payroll records do not include the correct local tax code.

Paid leave and disability programs

State-paid family leave, medical leave, disability, and similar programs continue to add another layer of payroll administration. Requirements can vary based on the employee’s work location, employer size, wage level, or method of coverage.

Inactive state accounts

Leaving a state does not always end the filing obligation automatically. An employer may continue receiving notices—or accumulating failure-to-file penalties—when an account remains open and required zero returns are not submitted.

Washington-Based Does Not Mean Washington-Only

Pacific Northwest employers can be particularly vulnerable to payroll-location gaps.

A Washington-headquartered company may hire someone who works from Oregon, Idaho, California, or another state. That single hiring decision may introduce new withholding, unemployment, registration, paid leave, or business-filing questions.

Washington employers also have their own payroll-related responsibilities, including unemployment insurance, Paid Family and Medical Leave, and WA Cares Fund premiums. Depending on the company’s location and activities, local requirements may also need to be considered.

The issue becomes more complex when employees split their time between states, move without notifying the employer, or work temporarily from another jurisdiction. The company’s headquarters may not change, but its payroll compliance footprint can.

The Cost Is More Than the Tax

Payroll reporting gaps can create financial and operational consequences well beyond the original amount that should have been withheld.

Paying before receiving a refund

When tax is paid to the wrong jurisdiction, the correct jurisdiction may still expect payment. The employer may need to pay the outstanding tax, penalties, and interest while separately pursuing a refund from the state that received the original payment.

That can create an unexpected cash-flow burden, especially when several years or employees are involved.

Correcting employee tax documents

Historical corrections may require amended payroll returns and corrected Forms W-2. Employees may then need to amend their personal income tax returns or respond to notices from states where they did not expect to file.

Even when the company resolves the issue, the process can create understandable frustration for employees.

Leaving older periods exposed

When a required return was never filed, the normal limitation period may not begin running. An issue that started several years ago can therefore remain open and continue growing until it is identified.

Creating transaction risk

Payroll tax exposure frequently receives attention during a financing, acquisition, or other due diligence process. Buyers and lenders may ask for additional documentation, require funds to be held back, or seek contractual protection against future assessments.

An issue that once looked administrative can quickly become a business valuation or deal-timing concern.

Treat Workforce Changes as Payroll Tax Triggers

Payroll tax compliance works best when it is connected to everyday operating decisions.

The goal is not to make every remote-work request or new hire a complicated tax project. It is to create a process that identifies when a decision needs further review.

A practical process may include:

1. Reviewing new-state hires before their start date. Determine which registrations, payroll accounts, and tax codes may be needed before the first payroll is processed.
2. Capturing employee moves promptly. Changes in residence and work location should be communicated among the employee, human resources, payroll, finance, and tax teams.
3. Tracking where services are performed. Employers with traveling employees, field teams, consultants, or project-based work may need more than a single home-address field.
4. Reviewing payroll configurations after a transaction. Acquisitions, reorganizations, entity transfers, and payroll-provider changes can affect withholding, unemployment reporting, wage bases, and account ownership.
5. Closing accounts deliberately. When the company leaves a jurisdiction, confirm that final returns have been filed and the applicable state or local accounts have been formally closed.
6. Assigning ownership. Someone should be responsible for deciding when a workforce change requires tax review. Without clear ownership, each department may reasonably assume another team is handling it.

A quarterly review is often more effective than waiting until year-end. By the time annual tax forms are being prepared, the underlying hiring, travel, or expansion decision may be many months old.

Start With a Payroll Footprint Map

One of the most useful first steps is to compare where payroll is currently reporting employees with where those employees actually live and work.

For each legal entity, the review should consider:

• The employee’s residence.
• Their primary work location.
• Other states or localities where they regularly perform services.
• The state used for income tax withholding.
• The state used for unemployment reporting.
• Applicable paid leave, disability, or similar programs.
• The employer’s registrations and open payroll accounts.

This exercise may identify underpayments and missing returns. It can also uncover overpayments, duplicate reporting, or wage-base errors—particularly after an acquisition, reorganization, employee transfer, or payroll-system conversion.

The objective is not to assume every difference is an error. The objective is to identify the differences, understand why they exist, and document the company’s reporting position.

Early Action May Preserve More Options

Historical payroll tax issues are generally easier to address when the employer identifies them before receiving a notice.

Some states offer voluntary disclosure or similar programs that may provide penalty relief, a limited lookback period, or another structured path toward compliance. Eligibility and terms vary by state and tax type. In many cases, prior contact from the taxing authority can limit or eliminate the opportunity to participate.

That makes timing important. An internal review gives the business an opportunity to quantify the issue, evaluate available remedies, and approach the jurisdiction with a plan rather than reacting to an audit or assessment.

A More Reliable Process Going Forward

Payroll tax complexity is manageable when employee data, payroll settings, state registrations, and internal responsibilities stay aligned.

The most important question is not simply whether payroll processed successfully. It is whether payroll still reflects where the company’s people are working today.

Whether your organization has expanded into new states, adopted remote work, completed a transaction, or simply has not reviewed its payroll footprint recently, a focused assessment can help:

• Identify current and historical exposure.
• Prioritize the most significant issues.
• Evaluate correction and voluntary disclosure options.
• Close unnecessary accounts.
• Improve coordination among payroll, human resources, finance, and tax.
• Reduce the likelihood of similar gaps developing in the future.

Larson Gross works with closely held businesses to evaluate multistate tax exposure, consider remediation options, and build more reliable compliance processes. A proactive review can help turn an uncertain payroll issue into a clear and manageable action plan.

Let’s Talk!

Your Larson Gross advisor can help you assess whether your payroll reporting footprint still matches the way your workforce operates.

This article provides general information only and should not be considered tax or legal advice. Payroll tax obligations depend on the employer’s specific facts, workforce arrangements, tax types, and jurisdictions. Consult a qualified advisor before taking action.