How a Boston Startup Cleaned Up Three Years of Unfiled State Returns
Sam's List Editorial | 2026-08-04
How a Boston Startup Cleaned Up Three Years of Unfiled State Returns This is an illustrative scenario, representative of the kind of multi-state cleanup work described below. Details are anonymized, figures are for illustration, and outcomes vary by state and by facts. Unfiled state tax returns are the most common expensive mistake in remote-first startups, and almost nobody makes it on purpose. You hire a great engineer who happens to live in Colorado, you run them through payroll, and nothing bad happens. So you do it three more times. This representative case follows a Boston software company that hired remote employees in four states, registered in none of them, and filed only its Massachusetts return for three years before anyone looked closely. The Problem The company had about twenty people. Roughly a third worked outside Massachusetts, spread across four states, hired over about thirty months as the team grew. Payroll ran through a national provider, which withheld and remitted Massachusetts tax by default because that was how the account had been configured on day one. No one changed it. The founders assumed, reasonably enough, that using a payroll company meant payroll compliance was handled. Three years of returns had been filed in Massachusetts and nowhere else. No state income tax or franchise returns outside the home state, no employer withholding accounts opened, and no registration with any secretary of state in the four employee states. The trigger was ordinary: a lead investor's diligence checklist asked for state tax filings by jurisdiction, and the answer was a blank column. Why It Was Four Problems, Not One The critical misunderstanding here is treating "state compliance" as a single item. Hiring one employee in a new state can create four separate obligations, each with its own registration, its own agency, and its own penalty regime. There is payroll withholding, which requires an employer account with the state revenue department and correct withholding from the first paycheck. There is state unemployment insurance, a separate registration with a separate agency. There is the company's own income or franchise tax filing, since in most states an employee working from home establishes nexus for the business itself. And there is foreign qualification, a registration with the secretary of state, which is corporate law rather than tax law and carries its own fees and, in some states, a penalty for operating unregistered. An employee in a state can trigger all four. Missing them accrues separate exposure on separate clocks. And in most...
