How does state income tax withholding work when you work in multiple states?

Working in multiple states changes both withholding and filing responsibilities. Broadly, your resident state taxes your worldwide income, while other states tax income sourced to work performed there. Employers — and sometimes employees — must account for that split so taxes are withheld and paid where required. Below I explain the rules, common pitfalls, practical steps, and how to reduce surprises at tax time.

Core rules that govern withholding and filing

• Resident state taxation: Your state of residence generally taxes all income you earn, regardless of where you earned it. This means you normally report all wages on your resident return.
• Nonresident/part-year taxation: States where you performed services may tax the income earned there. You usually file a nonresident or part-year return in each of those states to report that in-state income.
• Withholding responsibility: Employers typically withhold state income tax based on work location and employee residency, using state-specific withholding forms (the state equivalents of the federal W-4). Employers with multi-state employees must follow both the state where wages are paid and the employer’s state rules.
• Credits to avoid double taxation: Most states give a credit for taxes you paid to another state on the same income. That credit prevents you from paying the full rate to both states, though you may still owe a difference if your resident state’s rate is higher.

These principles align with standard tax guidance and practice; see the IRS resources on withholding and estimated taxes for federal rules and the Tax Foundation for state comparisons (IRS Pub. 505; Tax Foundation overview). For state-specific nuances, always consult the state Department of Revenue (DOR).

Why remote and hybrid work made this harder

Remote work blurred where services are “performed.” Traditionally, if you commuted to State B for work, State B taxed only the days worked there. With permanent remote work or frequent travel, employers and states disagree about which state has the right to tax certain wages. Some states assert taxing authority based on the employer’s location, some on the employee’s physical location while performing services, and others use a mixture of rules.

Because states have different definitions of residency and sourcing, you can end up with withholding in multiple states even when you believe you’re primarily a resident of one state.

Practical examples (illustrative, not exhaustive)

• Resident in State A, occasional work in State B: State B can tax wages for days worked there; State A taxes all wages but allows a credit for tax paid to State B.
• Work remotely from State C for a company located in State D: Both states may claim withholding rights. In practice, the employer often withholds for the state where payroll is based unless you provide a state-specific exemption or withholding certificate.

Always confirm with the state DOR and your payroll team — practical resolution depends on employer payroll setup and state rules.

Why employers sometimes withhold the “wrong” state tax

Payroll systems are largely automated. Employers usually set withholding based on the employee’s stated residence and the employer’s payroll nexus. When an employee works across state lines, payroll may: 1) withhold only the resident state, 2) withhold payroll state taxes, or 3) withhold both. Errors happen when employees don’t update their state withholding certificate(s) or when payroll software isn’t configured for multi-state work.

If incorrect withholding occurs, the employee can request payroll corrections and may need to make estimated tax payments or adjust withholdings to avoid underpayment penalties. See IRS Publication 505 for federal estimated tax rules and guidance on withholding adjustments.

Steps for employees: a checklist to reduce tax surprises

1. Track where you work: Keep a calendar of work locations and the number of days worked in each state — many states allocate wages based on days or hours worked in-state.
2. Confirm residency status: Understand whether you are a resident, statutory resident, or nonresident in each jurisdiction. Residency tests vary by state; some have a ‘‘statutory residency’’ rule tied to the number of days spent in the state.
3. Provide correct withholding forms: Complete the appropriate state withholding certificate(s). Many states have their own version of Form W-4 or a state withholding election form.
4. Talk to payroll: Ask payroll how they will withhold for multi-state wages and whether they can apply reciprocal agreement exemptions if available.
5. Estimate taxes quarterly if needed: If withholding won’t cover taxes owed across states, make quarterly estimated payments to avoid penalties (IRS Pub. 505).
6. File all required returns: File a resident return in your home state and nonresident/part-year returns in other states where you earned income. Claim credits on your resident return for taxes paid to other states.

Steps for employers: best practices

1. Confirm employee work locations: Collect up-to-date residence and work-location details from employees. Remote-work policies should include tax implications.
2. Configure payroll correctly: Modern payroll systems can withhold for multiple states or apply exceptions if reciprocal agreements exist.
3. Use state withholding certificates: Serve employees the correct state forms to capture their withholding elections.
4. Engage payroll counsel for nexus issues: Multi-state payroll can trigger employer filing requirements, unemployment insurance, and withholding nexus that require legal or tax counsel.

Common pitfalls and how to avoid them

• Missing a nonresident filing: If you earned income in a state but did not file, you may face back taxes, penalties, and interest. Check state DOR guidance early.
• Relying on assumptions about reciprocity: Reciprocal agreements exist but are limited and vary by state. Don’t assume a neighbor state has one.
• Not documenting days worked in each state: Without good records, you’ll struggle to support allocations on nonresident returns if audited.

Credits, allocations, and avoiding double taxation

Most states use one of two approaches to prevent double taxation:

• Resident credit: Your resident state lets you claim a credit for taxes paid to other states on the same income.
• Allocation: Nonresident states tax only income earned there using a formula (often a days-based allocation for wages).

Credits are normally limited to the tax attributable to the income taxed by the other state. If your resident state’s rate is higher, you may pay the difference but not the full tax twice.

Special situations

• Reciprocal agreements: Some states have agreements allowing residents to request exemption from withholding in the state where they work. Employees must file the proper exemption certificate with their employer.
• Permanent moves mid-year: A change in residency during the year usually means you file a part-year resident return in both states. Track the date of move and wages before/after the move.
• Self-employed and contractors: If you’re not on payroll, you must make estimated tax payments to each state where you have tax liability.

Where to look for authoritative answers

• IRS Publication 505, Tax Withholding and Estimated Tax — federal guidance about withholding and estimated payments: https://www.irs.gov/pub/irs-pdf/p505.pdf
• State Department of Revenue (DOR) websites — each state explains residency, withholding certificates, and reciprocal agreements. Search your state’s DOR site for the most current rules.
• Tax Foundation and similar policy organizations for summaries of state rules and remote-work developments.

For related reading on how state income taxes themselves work and planning for residency changes, see these FinHelp guides:

• “State Income Tax” — a general primer on state tax systems: https://finhelp.io/glossary/state-income-tax/
• “How to Stay Compliant When Changing State Residency for Tax Purposes” — practical steps if you move and change residency: https://finhelp.io/glossary/how-to-stay-compliant-when-changing-state-residency-for-tax-purposes/
• “How do state income tax laws generally work?” — background on resident vs. nonresident taxation: https://finhelp.io/glossary/how-do-state-income-tax-laws-generally-work/

Example workflow when you discover multi-state withholding issues

1. Review pay stubs to identify which states tax your wages and how much was withheld.
2. Compare the employer’s payroll location and your work-location calendar.
3. Ask payroll to rerun withholding if an obvious error exists (for example, they withheld your employer’s state when you never worked there).
4. If withholding won’t be corrected in time, plan estimated payments to states where you’ll owe tax.
5. File resident and nonresident returns, attaching any required wage allocation schedules and claiming credits for taxes paid elsewhere.

Final practical tips

• Keep documentation. Maintain a simple spreadsheet that lists dates, locations, and hours/days worked in each state.
• Start the conversation early. Tell payroll and HR about mixed-state work before year end so W-2s and withholding match your actual work pattern.
• Consult a tax pro for complex cases. In my practice I often see edge cases (e.g., split telecommuting arrangements, occasional in-state business travel combined with remote work) that need customized filing and withholding strategies.

Disclaimer

This article is educational and not personalized tax advice. State tax rules change, and facts matter. Consult a CPA, enrolled agent, or your state Department of Revenue for guidance tailored to your situation.