Overview
Remote work has changed the old assumptions about where wages are earned and which state may tax them. Traditionally, a state taxed residents on all income and nonresidents only on income earned inside its borders. Telecommuting blurs that line: you may live in one state while performing services for an employer based in another, or you may work from different states throughout the year. That raises three practical issues: which state should your employer withhold for, whether you qualify for a reciprocity exemption, and how to get credit or a refund if taxes were taken incorrectly.
This article explains the core concepts, step-by-step remedies, and real-world actions you can take. It also links to relevant guidance on the FinHelp site for deeper reading: see our pieces on State tax reciprocity, How Remote Work Affects State Tax Withholding, and How to File Taxes for Multiple States: Key Steps and Pitfalls.
Why this matters
If your employer withholds for the wrong state you can face: unexpected tax bills, delayed refunds, and additional filing complexity (resident and nonresident returns). In some cases withholding errors cost taxpayers thousands before they get a refund. Knowing how reciprocity and tax credits work — and how to correct mistakes — saves time and money.
Basic rules and terms
- Resident state: the state where you are domiciled or declare residency and typically pay tax on worldwide income.
- Work (source) state: the state where the services are performed. For telecommuters this may differ from the resident state.
- Reciprocity agreement: a bilateral agreement between two states that exempts nonresidents from income tax withholding in the work state; the resident state keeps primary taxing authority.
- Credit for taxes paid to another state: a dollar-for-dollar offset on your resident return for income taxed by another state, preventing double taxation in most cases.
Authoritative guidance: for federal-level withholding rules see IRS Tax Topic 505 (Tax Withholding and Estimated Tax) and guidance on amending returns (Form 1040-X). For consumer-focused state tax issues see the Consumer Financial Protection Bureau resources on state tax and employment issues (CFPB). Always confirm details on your state’s Department of Revenue website.
How reciprocity works (and how it helps telecommuters)
Some neighboring states have reciprocity agreements that allow residents of one state to work across the border without withholding in the work state. Common examples include the Maryland–Virginia and Washington D.C.–Maryland area arrangements. When reciprocity applies, employees generally submit a state-specific exemption or reciprocity certificate to their employer (the exact form and name vary by state) so withholding occurs for the resident state only.
If reciprocity exists between your resident and work states:
- Provide the employer the proper exemption form (not the federal W-4).
- Confirm payroll has implemented the change and that the correct state income tax is being withheld going forward.
If no reciprocity applies, you may still avoid double taxation through a credit on your resident return for tax paid to the work state.
What to do if withholding is wrong (step-by-step)
- Review paystubs and W-2s: confirm which state(s) have state tax withheld and the amounts.
- Talk with payroll promptly: many errors are fixed by submitting the correct residency or exemption form and updating payroll records. Ask payroll for a timeline and an updated W-2 (W-2c) if needed.
- If payroll won’t correct past withholding, file with the work state for a refund of incorrect withholdings (rules vary): you may need to file a nonresident return and claim a refund or file an affidavit if the state provides one.
- Claim a credit on your resident tax return: most states provide a credit for taxes paid to another state for the same wages; you’ll attach the nonresident return or proof of tax paid.
- Amend federal or state returns where necessary: if you already filed and need to change allocations, use the state’s amendment process and the federal Form 1040-X for federal adjustments where applicable (IRS guidance).
In practice, I regularly direct clients to request payroll issue a W-2c (corrected W-2) for prior-year withholding errors when the employer agrees. If the employer won’t cooperate, the refund claim process with the work state is the usual remedy.
Filing scenarios and examples
- Example 1 — Reciprocity: A Maryland resident who works remotely for an employer in Virginia can provide the Virginia exemption form and avoid Virginia withholding; the Maryland return reports the wages and taxes withheld in Maryland only.
- Example 2 — Nonresident work state + resident credit: A New Jersey resident works for a New York employer. New Jersey generally gives a credit for taxes paid to New York; the worker files a nonresident NY return for source income and claims a credit on the NJ resident return.
- Example 3 — No tax state resident: If you live in a no-income-tax state (e.g., Texas, Florida) but work for an employer in another state that taxes nonresidents, you may still owe tax to the work state on income sourced there; you will not have a resident-state credit because your home state has no income tax.
Note: state rules and credits vary. Do not assume uniform treatment across all states; always check state-specific statutes.
Employer responsibilities
Employers must withhold taxes based on employee withholding certificates and applicable state law. Employers also face growing complexity when they have remote workers in multiple states — some states require employer registration and withholding even if the employee’s duties are performed remotely from another state. Employers should consult multistate payroll guidance and register where required to avoid penalties.
If you are an employee, provide the correct state exemption or withholding form to payroll. If you’re an employer, see FinHelp’s employer-focused guidance on payroll withholding: Payroll Taxes for Employers: Withholding, Deposits, and Forms.
Common mistakes and how to avoid them
- Assuming your home state always controls withholding: wrong if your work state has stronger sourcing rules or if reciprocity isn’t in place.
- Not submitting the state exemption/certificate: if your state has a reciprocity form, failing to provide it causes unnecessary withholding.
- Waiting too long to fix wrong withholding: prompt action speeds refunds and avoids interest or penalties.
Practical prevention tips: keep copies of all exemption certificates, monitor payroll for correct implementation, and track wage allocation if you worked in multiple states during the year.
Remedies and timelines
- Employer correction (W-2c): fastest when payroll cooperates; corrected W-2 simplifies resident filing.
- Nonresident refund claim: time varies by state; some states require you to file a nonresident tax return claiming a refund and will take weeks or months to process.
- Resident credit claim: processed with your resident return — if you file timely and include documentation of tax paid to the other state, it typically resolves during standard processing windows.
Statute of limitations: each state has its own deadline to claim refunds or file amended returns. Don’t rely on memory — check the specific state revenue website or file as soon as you discover the error.
Checklist: What to do this tax year
- Confirm your official state of residency for tax purposes.
- Review payroll withholding and submit any reciprocity or exemption certificates immediately to payroll.
- If you move midyear, document move dates and adjust withholding; you may need to file a split-year or part-year return.
- Keep detailed records of days worked in each state if you travel for work — many states use day-counts to source income.
- If incorrectly withheld, start with payroll, then pursue a nonresident refund and claim resident credit as needed.
Frequently asked questions (brief)
- Will I pay tax in both states? Usually not — credits or reciprocity prevent two full taxations of the same wages, but you may have temporary duplicate withholding until corrected.
- What form exempts me from withholding under reciprocity? Each reciprocity pair uses a state-specific certificate; payroll can tell you the correct form or refer to your state revenue site.
- Can I force my employer to stop withholding for the work state? You can submit the correct exemption or residency certificate; employers must follow state rules and may require registration before they can change withholding.
Resources and authoritative links
- IRS: Tax Topic 505 (Tax Withholding and Estimated Tax) and Form 1040-X guidance (see IRS.gov).
- CFPB: consumer guidance on state and employment-related tax matters (consumerfinance.gov).
- State department of revenue websites: search your resident and work state revenue departments for reciprocity and nonresident filing instructions.
- FinHelp articles: State tax reciprocity, How Remote Work Affects State Tax Withholding, How to File Taxes for Multiple States: Key Steps and Pitfalls.
Professional note and disclaimer
In my practice I’ve seen prompt payroll communication and early documentation of residency/exemption forms resolve most withholding errors within a single tax year. This article is educational and not a substitute for personalized tax advice. State tax law changes frequently; consult a CPA or state tax attorney for guidance tailored to your situation.
Closing guidance
Telecommuting doesn’t eliminate state tax complexity — it shifts it. Proactive record-keeping, early communication with payroll, and knowledge of reciprocity and resident-credit rules are the most effective ways to avoid double taxation, secure refunds, and stay compliant.
