Overview
Remote work that crosses state lines creates a two-layer tax puzzle: federal withholding (what the IRS expects) and state withholding (what state revenue departments expect). Federal withholding adjustments change how much federal income tax is taken from each paycheck so that an employee’s total tax payments across the year better match their eventual federal tax liability. For remote employees, the mix of state residency rules, employer payroll practices, and multiple employers can make those adjustments essential.
In my practice working with remote employees and employers over the last 15 years, I regularly see avoidable tax surprises caused by not updating Form W‑4 or failing to notify payroll when an employee’s work location changes. The goal of the steps below is to reduce the chance of owing tax at filing time or incurring underpayment penalties.
Why does federal withholding matter when you work across state lines?
- Federal withholding is credited against your federal income tax liability. If it’s too low, you may owe at tax time and face penalties; if it’s too high, you give the government an interest‑free loan.
- State residency, reciprocity agreements, and employer withholding practices determine whether state income tax is also withheld and where you’ll ultimately pay state tax.
- Employers often rely on the employee’s reported work or home address and the information on Form W‑4 to calculate withholding. Changes in home or work state frequently require updates to payroll settings.
Authoritative sources: see IRS Form W‑4 guidance and IRS Publication 505 on withholding and estimated tax (IRS.gov/forms‑pubs and IRS.gov/publications/p505).
How federal withholding is calculated (short primer)
- Employees complete Form W‑4 (Employee’s Withholding Certificate) to tell employers filing status, dependents, and other adjustments. Employers use the Form W‑4 and federal withholding tables or payroll software to compute federal income tax withheld from each paycheck (see IRS: About Form W‑4).
- Publication 505 (Tax Withholding and Estimated Tax) explains situations that commonly change withholding needs, including multiple jobs, self‑employment income, and life events.
- Employers follow IRS guidance in Publication 15 (Employer’s Tax Guide) for payroll withholding and deposit obligations.
State considerations that interact with federal withholding
- State residency tests: Most states tax residents on worldwide income and nonresidents on income earned inside the state. Moving across state lines can change the state(s) that claim taxing rights over employment income.
- Employer withholding rules: Employers typically withhold state income tax based on the employee’s state of residence, work location, or a combination. Payroll systems must be configured correctly.
- Reciprocity agreements: Some states have reciprocity (for example, workers living in one state but working in another are exempt from withholding by the work state). Check state revenue websites for details.
- Credits for taxes paid to other states: If a remote employee pays tax to a work state as a nonresident, their home state may offer a credit to avoid double taxation.
Because state rules differ, federal withholding changes don’t eliminate the need to understand state rules—both must be coordinated.
Resources for state specifics include state revenue agency websites and the CFPB’s consumer guidance on taxes and moving (see consumerfinance.gov).
Employer responsibilities and payroll compliance
Employers should:
- Collect an accurate Form W‑4 and a current work/home address from each remote employee.
- Verify the state withholding requirement for each employee’s situation—residency or work state—especially when employees travel or permanently relocate.
- Adjust payroll systems when employees’ work locations cross state lines to apply the correct state withholding rules, unemployment insurance, and employer tax nexus considerations.
- Monitor multi‑state nexus and payroll tax obligations; failure to withhold properly can create liability for the employer for unpaid withholding taxes and penalties.
For payroll teams, see our guide: Remote Worker Payroll Compliance After Multi‑State Work Arrangements (internal: https://finhelp.io/glossary/remote-worker-payroll-compliance-after-multi-state-work-arrangements/).
Practical steps employees should take (action checklist)
- Update Form W‑4 after any move, change in filing status, or when taking a second job. Use the IRS online Tax Withholding Estimator to check whether you should increase or decrease withholding (https://www.irs.gov/individuals/tax-withholding-estimator).
- Tell payroll your new residence and, if applicable, your principal work location. Don’t assume payroll will learn a move automatically.
- Ask payroll which state they will remit state withholding to, and whether reciprocity applies.
- If you have multiple employers or side income, consider making estimated quarterly tax payments or increasing withholding at one employer to avoid underpayments. Publication 505 explains the rules for estimated taxes.
- Keep paystubs and end‑of‑year forms (W‑2s and any 1099s). Compare the sum of withholding reported on forms to what you expect based on your W‑4 and paystubs.
In my work, a simple but effective tactic is to designate one employer to withhold extra federal tax (via withholding additional amount on Line 4(c) of Form W‑4) if you have variable income from side work or multiple employers. That reduces the need to make quarterly estimated tax payments.
Examples (anonymized, real‑world style)
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Example 1: Remote employee lives in New Jersey and works for a California employer. The employer initially withheld only California state tax based on a corporate rule. After the employee notified payroll, withholding was updated so New Jersey state tax was either withheld or the employee claimed a credit at filing time—avoiding an unexpected state tax bill.
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Example 2: An employee who lives in Pennsylvania but works remotely for several out‑of‑state clients as a contractor was not subject to federal withholding on contract earnings. She used quarterly estimated tax payments and increased withholding on her W‑2 job to cover the combined tax burden, as recommended in Publication 505.
Common mistakes and how to avoid them
- Mistake: Not updating Form W‑4 after moving states. Fix: Submit a new W‑4 and confirm payroll changes.
- Mistake: Assuming employer will automatically change state withholding. Fix: Communicate in writing to payroll and request confirmation.
- Mistake: Overlooking local taxes (city, county). Fix: Check local tax obligations with state/city revenue offices.
Tools and authoritative resources
- IRS — About Form W‑4 and instructions: https://www.irs.gov/forms-pubs/about-form-w-4
- IRS — Publication 505, Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505
- IRS — Publication 15, Employer’s Tax Guide: https://www.irs.gov/publications/p15
- Consumer Financial Protection Bureau — general tax and moving guidance: https://www.consumerfinance.gov
Internal FinHelp resources
- Completing Form W‑4: Tips for Accurate Withholding — https://finhelp.io/glossary/completing-form-w-4-tips-for-accurate-withholding/
- Handling Withholding Changes After Relocating Across States — https://finhelp.io/glossary/handling-withholding-changes-after-relocating-across-states/
- Remote Worker Payroll Compliance After Multi‑State Work Arrangements — https://finhelp.io/glossary/remote-worker-payroll-compliance-after-multi-state-work-arrangements/
Final practical checklist (quick)
- Submit a current Form W‑4 when you change residence or employment.
- Confirm with payroll which state(s) are being withheld and why.
- Use the IRS Tax Withholding Estimator and Publication 505 to test different withholding scenarios.
- Consider estimated quarterly payments if you have substantial non‑wage income.
- Keep records and request written confirmation of payroll updates.
Professional disclaimer: This article is educational and general in nature. It is not personalized tax or legal advice. For specific guidance about your situation, consult a qualified tax professional or attorney. References to IRS guidance are current as of 2025; always confirm details with the IRS or your state revenue department before making tax decisions.
