Overview
Remote internal transfers — moves or prolonged telework that keep an employee on the same payroll while they perform duties from a new state — create multistate withholding rules that both employers and employees must follow. In my 15+ years advising employers and remote workers, missteps often arise from assuming payroll simply follows the employer’s headquarters. That assumption exposes employers to registration, withholding, reporting, and penalty risks and leaves employees with unexpected state tax bills.
Authoritative sources to review include the IRS Withholding Estimator (https://www.irs.gov/individuals/tax-withholding-estimator) and summaries of state reciprocity and nexus rules from the National Conference of State Legislatures (https://www.ncsl.org). For practical employer payroll compliance, see our employer checklist on FinHelp: Handling Multistate Withholding for Telecommuting Employees (https://finhelp.io/glossary/handling-multistate-withholding-for-telecommuting-employees/).
Why this matters now
Since the pandemic, states have increased scrutiny of income sourced to their jurisdiction. States use withholding as a primary enforcement tool; failure to register and withhold correctly can result in back taxes, interest, and payroll penalties. In practice, employers who move quickly to register for withholding and adjust pay processes avoid the largest exposures, while employees who track residency and file properly avoid double taxation.
Key concepts you must know
- Residency vs. source: Residence state taxes residents on worldwide income; source states tax income earned for work performed inside their borders. Rules vary by state. (See NCSL state summaries.)
- Nexus and payroll registration: Employers usually must register to withhold and remit taxes in any state where they have payroll nexus, which can be triggered by remote employees working there.
- Reciprocal agreements: Some states have reciprocity that lets residents avoid withholding for the work state if they file the proper exemption form with their employer. (Confirm rules at state revenue sites and NCSL.)
- Withholding certificates: States may require employee forms equivalent to a state W-4 or a reciprocal exemption certificate.
- Credits and allocation: When income is taxed by both resident and nonresident states, most resident states allow a credit for taxes paid to another state — but you still must file returns where required.
Practical steps for employers (operational checklist)
- Identify employee work location(s) immediately after any transfer, temporary assignment, or change of residence. Document dates.
- Determine whether the new location creates payroll nexus. If it does, register the company with that state’s withholding and unemployment agencies.
- Obtain the correct state withholding or exemption certificate from the employee (for example, a state W-4 or reciprocity form). Keep signed forms in employee files.
- Configure payroll systems to withhold based on the employee’s work/residency rules and the employer’s withholding obligations. Modern payroll providers have multistate functionality; validate calculations for the specific state rules.
- Remit withheld taxes and file state withholding returns on schedule. Missing filings creates liability for the employer.
- Monitor temporary travel: short-duration work in other states can still trigger withholding or reciprocity obligations depending on days and state rules.
- Communicate changes in withholding to employees and provide instructions on filing nonresident or part‑year returns as needed.
In my practice, proactively engaging payroll vendors and state registration early prevents most remediations later. Employers should also consult the FinHelp employer compliance checklist: Employer Compliance Checklist: Payroll, Withholding, and Reporting (https://finhelp.io/glossary/employer-compliance-checklist-payroll-withholding-and-reporting/).
Practical steps for employees
- Track your physical work locations and dates. Residency and source tests often rely on day counts and intent.
- Notify HR/payroll of any relocation or regular telework from a new state as soon as possible.
- Complete any state withholding or reciprocity certificates your employer requests. If you live in a state with no income tax (e.g., Florida), you may still need to file in the employer’s state if source rules apply.
- If you expect under‑withholding, increase your payroll withholding or make estimated tax payments to avoid underpayment penalties. Use the IRS Withholding Estimator as a starting point and check state calculators where available.
- File resident and nonresident returns where required. Claim credits on your resident return for taxes paid to other states.
Common real‑world scenarios and how to handle them
- Employee moves from State A to State B but keeps the same employer: Employer must determine if it needs to register and withhold in State B. If State A is the employee’s residence, State B may still require nonresident withholding for wages earned in State B depending on the facts.
- Temporary work periods in a third state: Short trips may or may not create withholding obligations depending on day thresholds and state rules. Always check the state’s guidance for transient workers.
- Reciprocal states: If employee lives in State X and works remotely for an employer in State Y, a reciprocal agreement may allow an exemption (file the state’s reciprocity form). Keep evidence of the employee’s residency.
Common mistakes and how to avoid them
- Assuming employer withholding is only tied to corporate HQ: Register for withholding in any state where employees actually work.
- Ignoring local or city taxes: Cities or localities may impose taxes or registration requirements beyond state rules.
- Failing to collect or retain state withholding certificates: Documentation reduces audit risk.
- Delaying registration: Late registration escalates penalties and interest.
Resolving errors and audits
If withholding was handled incorrectly:
- Employers should calculate the exposure (taxes, interest, penalties) and inform the employee about expected impacts.
- Employees can generally claim refunds by filing nonresident or amended returns if they were over‑withheld. If under‑withheld, employees may need to pay estimated taxes or increase withholding to catch up.
- Engage a payroll tax specialist or state tax counsel when exposures are material.
Documentation and recordkeeping
Maintain clear records of:
- Employee transfer/telework notices and effective dates
- Completed state withholding or reciprocity certificates
- Payroll feeds showing state allocations and amounts withheld
- State registration confirmations and account numbers
Keep records for at least the period states can audit (often 3–6 years, varies by state).
Examples (short)
Example A — Move across state lines: An employee moves residency from State A to State B mid‑year. The employer documents the move date, collects the appropriate state withholding form, registers in State B if required, and adjusts withholding from the move date forward. The employee files part‑year resident returns and claims credits for taxes paid to other states.
Example B — Frequent remote work across states: An employee who spends regular weeks in multiple states should have payroll configured to allocate wages by work location or seek advice on apportionment methods required by those states.
State‑by‑state complexity and special rules
Some states have unique doctrines (for example, the so‑called “convenience of the employer” rule used historically by certain states) that change how income is sourced. These rules differ and can dramatically affect withholding obligations. Always verify specific state guidance and revenue bulletins.
Resources
- IRS Withholding Estimator: https://www.irs.gov/individuals/tax-withholding-estimator
- National Conference of State Legislatures: https://www.ncsl.org (search state reciprocity and nexus issues)
- FinHelp glossary entries: Handling Multistate Withholding for Telecommuting Employees (https://finhelp.io/glossary/handling-multistate-withholding-for-telecommuting-employees/), Multistate Filing for Remote Workers: Residency and Withholding (https://finhelp.io/glossary/multistate-filing-for-remote-workers-residency-and-withholding/)
Next steps
Employers: run a rapid audit of where your employees physically work, register where required, and validate payroll vendor settings. Employees: keep HR informed of relocations, save residency evidence, and plan for possible multi‑state filings.
Professional disclaimer: This article is educational and does not constitute tax or legal advice. Individual situations vary — consult a CPA, payroll tax specialist, or state revenue department for advice tailored to your facts.
(References: IRS withholding guidance; NCSL state tax summaries; Tax Policy Center analysis.)
