Managing State Tax Accounts for Startups: What to Consider when an Employee Leaves

As more and more startups opt for remote work, the question of state tax nexus becomes increasingly important. State tax nexus is when a state's taxing authority is applied to a startup's sales or income, and it is determined by factors such as the type and amount of business the company is conducting in that state, as well as whether a company has employees and rents or owns property in a state. For startups, this can be a tricky issue to navigate, especially when employees leave the company.

When a co-founder or employee is the sole employee in a particular state and leaves your company, you then have to make a decision: do you want to save money now by shutting down those accounts, or do you want to keep it open by spending a little bit more money, ensuring you don't have to redo all of the work if you hire someone in that state in the future? This decision can be even harder when the state in question is a high-tax state like California or New York, which require a lot of fees.

The process of closing a state tax account is not a quick one, and it will require you to alert the state tax authority, file a final tax return, and file a surrender form. Additionally, you will likely have to pay a CPA firm to handle all of the paperwork for you. This can take up a lot of time and money, so it's important to carefully weigh the pros and cons of closing the account.

If you make the decision to shut the account down but six months later you find the perfect candidate in a state where you've just closed your accounts, you will have to go through the entire registration process again. This is a scenario you want to avoid, so our advice to founders planning on hiring in the near term is to keep the account open for a while. The life of a startup fluctuates and you just never know when things might take off and you need to hire a number of people in one of these states. Keeping the account open for the next six to nine months allows far greater flexibility.

In conclusion, when you have even one employee working in a different state, your company is required to open a state tax account. If that employee leaves, and you have no other employees in that state, you are free to close it. However, we recommend keeping that account open for a while until you know your future hiring plan and can make informed decisions. If you know you are going to hire in that state again, it's best to keep it open to avoid any unnecessary complications.