As a growing digital agency, it’s easy to focus on landing clients across the country. But have you stopped to consider whether your tax filings are keeping up? Expanding into new states (even without opening an office) can trigger obligations you may not be aware of.
The key concept here is nexus – the connection that gives a state the right to tax your business. For agencies, nexus can be created in more ways than you might think.
What Creates Nexus for an Agency?
- Revenue thresholds
Most states now have “economic nexus” rules tied to revenue earned from customers in that state.
- In many cases, the threshold is around $100,000 in revenue.
- Some states also use transaction counts (e.g., 200 sales) as a trigger.
- Once you cross that threshold, you may need to register, file, and pay taxes in that state – even if you never set foot there.
- In many cases, the threshold is around $100,000 in revenue.
- Remote employees
Having even one employee working remotely from another state almost always creates nexus. For agencies with distributed teams, this is one of the most common and overlooked filing triggers. - Physical presence
Having an office, co-working space, or even regular in-person meetings in a state can create a filing requirement. - 👉 Here’s Avalara’s chart with a state-by-state breakdown you can use as a reference.
When Nexus Means You Need to File
Once nexus is met, the requirement typically goes beyond just filing a state income tax return. In many states, you’ll also need to:
- Register with the Department of Taxation (or equivalent) to file income and withholding returns.
- Register with the Secretary of State to legally transact business in that state.
These registrations become an administrative headache for agencies:
- They need to be opened when you hire a new employee in a state.
- They need to be closed if that employee leaves and they were your only presence there.
- Keeping track of multiple registrations across different states quickly becomes a full-time job.
High-Impact States to Watch
Some states are especially aggressive about tracking nexus and enforcing compliance:
- California – One of the strictest states; even minimal connections can trigger filing requirements.
- New York – Known for aggressive audits and a wide definition of taxable presence.
If your agency has clients or employees in these states, you should assume scrutiny will be high.
Risks of Not Filing Where You Should
Ignoring state requirements doesn’t usually go unnoticed forever. Risks include:
- Penalties and interest: States can assess back taxes going back years.
- Jeopardized acquisitions: If you plan to sell your agency, buyers will scrutinize state tax compliance. Nexus issues can delay or even kill a deal.
- Payroll challenges: Non-compliance can make paying employees and expanding into new states much harder.
Staying Ahead
As your agency grows past $500k, state tax compliance becomes a silent risk that can sneak up on you. The good news? With planning, it’s manageable.
At Agency CPAs, we help digital agencies navigate these filing requirements – from analyzing your client and employee footprint to handling registrations, ongoing compliance, and closing accounts when they’re no longer needed.
Next Step:
Take a look at your revenue and team map today. Are you sure you’re filing in all the states where you should? If not, let’s talk.
