When a telehealth company hires its first out-of-state provider, payroll gets 10x more complicated. Different tax rates, registration requirements, and filing deadlines across multiple jurisdictions—it’s a compliance minefield. And all it takes is one missed registration or misclassified employee to trigger penalties, stop your operations, and even ruin your expansion plans if severe enough.
That’s why we’ve compiled the 10 most common, costly, and significant mistakes in telehealth payroll tax compliance—so you know what to avoid as you scale. From missing municipal taxes to botched employee classifications, these are the compliance potholes that can derail even the best laid plans.
10 Telehealth Payroll Compliance Mistakes to Avoid
1. Misclassifying Employees and Contractors
Why it happens: Telehealth organizations often use a mix of W-2 employees and 1099 contractors, both clinical providers and non-clinical staff, making classification very complex. State and federal definitions don’t always align, meaning a contractor in one state may legally be an employee in another. The temptation to classify healthcare providers as contractors to reduce tax obligations and administrative burden can backfire spectacularly.
What it leads to:
- Liability for unpaid payroll taxes, back pay, and penalties
- Lawsuits for missed benefits, overtime, or leave eligibility
- Disruption to your telehealth services during audits
How to avoid it:
- Use clear, written criteria for every role based on IRS and state-specific guidelines
- Audit classifications quarterly, especially as job duties evolve in your telemedicine practice
- Train hiring managers and legal teams on how multistate regulations differ
- Consider partnering with an attorney and tax advisor with telehealth expertise to review classifications
- Use centralized HR platforms to standardize classifications across locations and flag inconsistencies
2. Failing to Register Payroll Tax Accounts in Every State
Why it happens: Teams onboard employees before realizing they need to register with state tax agencies. Unfortunately, not all states make the process easy or clear, with most even requiring separate registrations for income tax, unemployment insurance, and local paid leave. These complications multiply further when healthcare organizations quickly expand their virtual care services.
What it leads to:
- Penalties for late or missing tax payments
- Delays in payroll runs or halted onboarding
- Noncompliance with new hire reporting requirements
- Risk to your corporate practice structure
How to avoid it:
- Register before you issue the first paycheck in any state
- Maintain a live payroll registration tracker with due dates, confirmation numbers, and logins per state or, better yet, use an automated registration solution like Mosey that streamlines the process for you.
- Delegate compliance ownership internally or use an automated system that initiates registrations once an employee is added
- Build registration timelines into your telehealth tax planning process
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3. Not Accurately Tracking Employee Work Locations
Why it happens: Remote workers move or work from temporary addresses without notifying HR. It’s the nature of the beast. So, time-off requests and timesheets may reflect incorrect work jurisdictions. And hybrid roles or teletherapy sessions crossing state lines tangle things even more in the context of telehealth service delivery.
What it leads to:
- Tax filings in the wrong state (or missed jurisdictions entirely)
- Withholding errors affecting both employer and employee
- Higher audit risks, especially in states with aggressive enforcement
- Potential violations of medicine laws and licensing requirements
How to avoid it:
- Require address re-verification during open enrollment and quarterly check-ins
- Implement clear policies about work location reporting for all healthcare services staff
- Use digital tools that tie payroll to verified locations
- Document all location changes to maintain compliance with local tax considerations
4. Missing Local and Municipal Tax Requirements
Why it happens: While most HR teams have federal and state taxes down pat, local jurisdictions are where things get tricky. Cities like NYC, Philadelphia, and San Francisco each have their own tax rules, and they can vary dramatically even within the same metro area. For telehealth organizations with distributed teams, these local requirements often fly under the radar until it’s too late.
What it leads to:
- Missed withholding or employer-side contributions
- Retroactive liabilities or double taxation claims from employees
- Compliance failures that affect gross receipts tax calculations
- Disruption to billing services when tax issues arise
How to avoid it:
- Maintain a comprehensive list of all known local tax jurisdictions where your employees provide telemedicine services
- Review city/county tax maps before hiring or relocating staff
- Include local tax obligations in your standard telehealth tax questions during onboarding
- Work with payroll platforms that incorporate local tax lookups
5. Missing or Late Payroll Tax Filings
Why it happens: Here’s where even experienced HR teams can stumble: filing deadlines aren’t standardized. Some states want monthly filings, others quarterly, and a few only annually. Add in the fact that each tax type might have its own schedule, and you’ve got a recipe for missed deadlines. So, when staff turnover hits or responsibilities get fragmented, it’s easy for filing dates to slip through the cracks, especially with paper-based processes.
What it leads to:
- Penalties ranging from 2% to 15% of unpaid tax (federal)
- Additional state penalties and interest charges
- Risk of payroll account suspension or enforcement actions
- Potential unrelated business income tax issues for certain healthcare organizations
How to avoid it:
- Assign clear filing responsibilities within HR/payroll teams
- Build a centralized compliance calendar covering all tax and state requirements
- Create detailed guides for each state’s filing process
- Automate tax filings wherever possible through integrated billing software
- Establish backup procedures for critical filing dates
6. Not Keeping Up with Changing State Payroll Laws
Why it happens: Just when you think you’ve got a handle on things, states go and change the rules. Every year brings new rates, updated thresholds, and revised tax requirements, often with minimal advance notice. Throw in new paid leave laws, shifting unemployment rates, Medicare and Medicaid updates, plus expiring tax credits, and it’s no wonder HR teams struggle to keep up. This challenge intensifies when you’re managing a growing healthcare practice across 10+ states.
What it leads to:
- Under- or over-withholding affecting revenue calculations
- Eligibility gaps for benefits like paid family leave
- Noncompliance discovered during routine audits
- Missed opportunities for tax credits or incentives
How to avoid it:
- Subscribe to official state tax and labor newsletters
- Build compliance reviews into quarterly HR operations
- Use a platform that automatically updates payroll tax rules by state
- Get insight on state changes from trusted healthcare news sources
- Schedule regular reviews with your tax director or compliance team
7. Poor Payroll Recordkeeping and Documentation
Why it happens: Payroll documentation usually isn’t a favorite task across a team. As a result, critical records can easily end up scattered across multiple systems, buried in spreadsheets, or worse, sitting in someone’s email inbox. W-4s live in one place, wage statements in another, and good luck finding that state filing confirmation from six months ago. This fragmentation becomes a real nightmare when you’re managing equipment and employees across multiple locations.
What it leads to:
- Inability to respond effectively to tax notices or audit requests
- Missed deadlines for data retention requirements
- Difficulty demonstrating compliance with wage and hour laws
- HIPAA violations if patient care delivery records intersect with payroll data
How to avoid it:
- Use one digital hub for storing and retrieving all payroll compliance records
- Document every tax-related change and filing action
- Ensure audit logs include time/date stamps and access history
- Separate clinical documentation from payroll records to maintain security and logistics
- Implement retention policies aligned with both tax and healthcare regulations
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8. Miscalculating Overtime and Shift Pay
Why it happens: Healthcare never sleeps, and neither do the complications around paying for it. Your providers work variable shifts, split schedules, and on-call hours, including hotline nurses, after-hours telehealth staff, and weekend administrative teams. And, once again, overtime rules change from state to state (some calculate daily, others weekly) and the line between exempt and non-exempt status gets blurry when it comes to roles providing medical services.
What it leads to:
- Wage and hour violations affecting your business
- Legal claims for back pay and penalties
- Erosion of trust with clinical teams
- Disruption to patient outcomes when staffing issues arise
How to avoid it:
- Implement role-specific pay rules tied to job codes and states
- Use payroll software with built-in wage law logic per state
- Train supervisors on time tracking for telehealth visits
- Review practitioner classifications regularly
- Document all overtime policies clearly
9. Skipping Regular Internal Payroll Audits
Why it happens: Once the payroll system is humming along, it’s tempting to leave well enough alone. But that “set it and forget it” mentality is dangerous, especially when you’re scaling fast. Audits get pushed aside when hiring ramps up or during the chaotic stage of implementation for new telehealth technology. Plus, many teams assume their platforms catch everything automatically—spoiler alert: even the best ones still need you to steer the ship.
What it leads to:
- Small errors snowball across hundreds of pay periods
- Increased payroll tax issues discovered during external reviews
- Loss of confidence in data integrity
- Higher costs to remediate problems later
How to avoid it:
- Schedule internal payroll audits at least twice per year
- Include multi-state tax registration, wage calculations, and classification in scope
- Review sourcing rules for income allocation
- Use automated tools to surface anomalies in real time
- Document all audit findings and remediation steps
10. Relying on Undertrained Staff or Outdated Processes
Why it happens: An uncomfortable truth: telehealth companies grow faster than their back-office capabilities. Your clinical team might double in size while HR stays the same. New staff members get thrown into the deep end without understanding multi-state requirements or specific telehealth tax compliance rules. Meanwhile, those legacy systems you’ve been meaning to upgrade? They can’t handle multi-state logic, local tax rules, or the sophisticated sourcing requirements you now face.
What it leads to:
- Repeated compliance failures
- Over-reliance on external consultants
- Inability to support business growth
- Increased risks as telehealth revenues expand
How to avoid it:
- Invest in training on multi-jurisdictional payroll basics
- Build SOPs for onboarding in new states
- Create comprehensive guides for common scenarios
- Modernize your compliance tech stack to handle complexity at scale
Best Practices for Telehealth Tax Compliance
Beyond avoiding these common mistakes, successful telehealth organizations implement proactive strategies:
- Use a Compliance Platform Instead of Manual Checklists: Automate multi-state tracking for registrations, filing deadlines, and local tax rules.
- Address Common Telehealth Tax Questions Early: Establish clear policies on employee classification, work location tracking, and multi-state obligations before issues arise.
- Integrate Compliance with Operations: Ensure your billing software, HR systems, and payroll platforms share data seamlessly to reduce manual errors.
- Plan for Growth: Build scalable processes that can accommodate new states, changing regulations, and evolving service models.
- Maintain Strong Documentation: Keep detailed records of all compliance decisions, tax filings, and employee data to support future audits.
Mosey Keeps You Compliant
Payroll tax compliance is one of the most overlooked risks in telehealth HR, but it’s also one of the most fixable. Whether you’re scaling from five states to fifteen or just trying to clean up a few legacy issues, staying ahead of multistate rules doesn’t have to mean drowning in paperwork, checklists, or deadlines.
With the right systems in place, you can avoid the most common payroll mistakes, keep your team compliant, and free up HR to focus on what really matters: building a workforce that delivers better care.
Thankfully, Mosey helps telehealth companies automate multistate compliance from day one. From registrations to payroll tax tracking, we handle the complexity so you don’t have to. So book a free demo today and see how Mosey can actually transform multistate compliance into a strength. Yes, it’s possible.
FAQ: Telehealth Payroll Tax Compliance
Do I need to register for payroll taxes in every state where I have a remote employee?
Yes—most states require employer registration before the first paycheck is issued. This applies whether employees are providing direct patient care or supporting healthcare services remotely.
What’s the difference between federal, state, and local payroll taxes for telehealth providers?
Federal payroll taxes are uniform across the U.S., but state and local taxes vary based on employee location and role. Telehealth organizations must comply with all three levels, which may include special healthcare-related taxes or exemptions.
Can a payroll provider or PEO handle state compliance for telemedicine services?
Some can handle basic compliance, but most require manual inputs and may not understand healthcare-specific requirements. Neither will usually handle registering for the correct payroll tax accounts, especially in client-reporting states. Specialized compliance platforms designed for multi-state operations often provide more comprehensive coverage.
How often should we audit our telehealth payroll setup?
At least twice a year, with additional reviews when hiring in new states, implementing new telehealth technology, or updating systems. Regular audits help catch issues before they become costly problems.
Are there special tax considerations for telehealth equipment or technology?
Yes—some states tax telehealth technology differently, and equipment provided to remote workers may trigger additional tax obligations. Consult with a tax advisor familiar with healthcare technology requirements.
