How Remote Work Affects State Tax Withholding

Overview

Remote work shifts the simple rule that used to apply when people worked in the same state as their employer: where you live and where you perform your work both matter for state income tax withholding. That matters because employers are responsible for withholding and remitting state income tax based on the rules of the state(s) that apply to an employee’s earned income. If withholding is wrong, employees can face unexpected tax bills or penalties; employers can face compliance and registration problems.

(Authoritative resources: see IRS list of state websites and employer guidance at https://www.irs.gov/businesses/small-businesses-self-employed/state-government-websites and state guidance such as New York’s telecommuting rules at https://www.tax.ny.gov/pit/nonresident/telecommuting.htm.)

Why state withholding gets complicated with remote work

• Different states use different tests to define residency and source of income (physical presence, domicile, or specific-day thresholds).
• Some states tax nonresidents on income earned in the state (sourced income); others focus on residency. A remote worker can create taxable presence (and withholding obligations) in multiple states.
• States vary in how they treat telecommuting for a state-based employer. A few use a “convenience of the employer” rule that can require tax withholding in the employer’s state even if the employee works from another state.
• Employers may need to register to withhold in an employee’s state even if the company has no other ties there. That creates administrative complexity for payroll and unemployment insurance filings.

Key rules and concepts to know

• Residency vs. source: Your state of residence usually has primary taxing rights over your worldwide income, but many states tax nonresidents on wages earned inside the state. Most states offer a credit to residents for taxes paid to another state to prevent double taxation (check your state code). (See state tax credit rules and resident-credit guidance on state department of revenue sites.)
• Reciprocity agreements: Neighboring states sometimes agree that only the resident state collects income tax on wages (common in the Mid-Atlantic and Midwest). If a reciprocity rule applies, employees typically submit a withholding exemption form to the employer. (Check your state’s Department of Revenue.)
• Convenience-of-the-employer rules: Some states (notably New York) historically required nonresident employees of in-state employers to pay income tax on wages earned while telecommuting from out of state if the work-from-home arrangement was for the employee’s convenience rather than the employer’s. This rule is state-specific and has been the subject of litigation and legislative attention—confirm the current position with the state’s tax authority. (New York guidance: https://www.tax.ny.gov/pit/nonresident/telecommuting.htm.)
• Withholding registration and employer obligations: If an employee performs services in a state, the employer may have to register for withholding and unemployment insurance there. Employer payroll teams should consult state registration requirements and, when needed, seek multistate payroll support.

Practical examples (real-world scenarios)

• Remote in one state, employer in another: Jane lives and works full-time from New Jersey for a New York company. New Jersey taxes residents on all income, while New York may tax wages for work performed in New York or under its convenience rule. Jane should ask her employer to withhold New Jersey tax; if New York tax is withheld, she may claim a credit on her New Jersey return to avoid double taxation, but she should document days worked and the employer’s withholding rationale.
• Digital nomad or frequent traveler: Marcus travels between Ohio and Michigan for client work. He should track where he performed work and the income attributable to each state. Accurate day-by-day logs make it easier to determine withholding and file correctly.
• Employer hires remote workers nationwide: A mid-sized tech company headquartered in Illinois hires workers in Georgia, California, and Texas. The employer must know each state’s withholding rules (California and Georgia have state income tax; Texas does not) and may need to register to withhold in states where employees reside.

Steps employees should take now

1. Tell payroll and HR your principal work location and residential address; provide any state withholding or reciprocity forms required by your employer. Most states have a state employee withholding certificate equivalent to the federal W-4.
2. Keep a day-by-day work log if you split time between states or travel for work. Good records help support sourcing and residency positions.
3. Monitor your pay stub: confirm the correct state and local taxes are being withheld. If withholding is missing, you could owe estimated payments.
4. Understand credits: if you pay tax to a nonresident state on wages, your resident state may give a credit to avoid double taxation — confirm limits and filing rules with your state tax agency.
5. Consult a tax professional if your situation is multistate, complex, or involves significant income changes.

Steps employers should take now

1. Map employee work locations and determine whether the company must register for withholding and unemployment insurance in each state where remote employees work.
2. Ask remote hires for their state withholding form and official address. Update payroll systems to apply correct state and local withholding.
3. Consider central payroll policies: some employers use “work state” withholding, while others follow the employer’s headquarters—either choice must align with state rules.
4. When unsure, consult multistate payroll vendors or a state tax advisor. Employers can face substantial penalties for failing to withhold or to register properly.

Common mistakes and how to avoid them

• Mistake: assuming no withholding needed because the employer is in a no-income-tax state (e.g., Texas, Florida). If the employee lives in a state that taxes income, the employer must withhold according to the employee’s state (or the employee must make estimated payments).
• Mistake: not filing reciprocity forms where they exist — this leaves unnecessary withholding in place.
• Mistake: failing to track where work is performed. Fix: keep contemporaneous records (calendar or time-tracking app) showing work location by day.

Frequently asked questions (short answers)

• Do I pay taxes in both my home state and my employer’s state? Many workers do not ultimately pay double tax: your resident state generally gives a credit for taxes paid to another state for the same wages. But withholding rules and timing can create interim cash-flow issues.
• Can my employer withhold without my consent? Employers are required to withhold when state law requires it. Employees provide state withholding forms to guide the employer; failing to submit the proper state form doesn’t prevent an employer from withholding based on state law.
• Who decides tax residency? Each state sets its residency tests; common factors include where you spend most days, where you keep a permanent home, voter registration, driver’s license, and where your family lives. A state’s statutory residency test and administrative guidance control the outcome.

Recordkeeping checklist

• Copy of your state withholding certificate submitted to payroll.
• Day-by-day log of work locations and business travel.
• Pay stubs showing state and local withholding.
• Copies of filed state tax returns and any credit claims for taxes paid to other states.

Related reading on FinHelp

• Multistate filing practical guidance: “Multistate Filing for Remote Workers: Residency and Withholding” (FinHelp) — overview and filing steps: https://finhelp.io/glossary/multistate-filing-for-remote-workers-residency-and-withholding/
• Residency guidance for frequent travelers: “State Residency Rules for Digital Nomads and Remote Workers” (FinHelp) — how states decide residency and practical tips: https://finhelp.io/glossary/state-residency-rules-for-digital-nomads-and-remote-workers/

Where to check authoritative guidance

• State Departments of Revenue (use the IRS list of state websites to find links): https://www.irs.gov/businesses/small-businesses-self-employed/state-government-websites
• IRS Employer and payroll publications (Publication 15 offers federal employer guidance; for state withholding rules, reference state agencies): https://www.irs.gov/pub/irs-pdf/p15.pdf
• State-specific telecommuting and withholding guidance (example — New York): https://www.tax.ny.gov/pit/nonresident/telecommuting.htm

Final practical advice and next steps

If you’re a remote worker, the most productive first step is to notify your employer of your primary work location and confirm what state tax is being withheld. If you’re an employer, inventory remote employee locations and check registration and withholding obligations with each applicable state. For complex situations involving multiple states or high income, consult a CPA or state tax attorney. State rules change — verify current guidance with the state Department of Revenue before relying on it.

Professional disclaimer: This article is educational and not personalized tax advice. For decisions that materially affect tax liability, consult a licensed tax professional or your state tax agency.