Multistate Filing for Remote Workers: Residency and Withholding

Overview

Remote work increases the likelihood that you’ll interact with more than one state’s tax system—your state of residence, the state where your employer is located, and any state where you actually perform services. Each state sets its own rules on residency, sourcing of income, and withholding. The result: many remote workers must file a resident return, one or more nonresident returns, or both, and may need to adjust withholding or make estimated payments to avoid liabilities or refund delays.

Why residency matters and how it’s determined

States determine tax liability using two related but distinct concepts: domicile (legal home) and residency (where you live during the tax year). Domicile is a long‑term intent test—where you intend to return—while residency often depends on physical presence or statutory day-count tests (for example, 183 days in many states). Different states apply these tests differently; some emphasize statutory days, others examine ties like a driver’s license, voter registration, or location of family and property.

• Domicile vs. resident: You can be domiciled in one state but tax resident in another if you spend enough time there or establish significant ties.
• Day-count rules: Many states use 183‑day or similar thresholds, but the details and counting conventions vary by state.

For a deeper primer on state residency concepts, see FinHelp’s guide on State Tax Residency Rules.

How states source wage income

States generally tax residents on all income, wherever earned, and nonresidents only on income sourced to that state. Wage sourcing rules normally follow the physical location where services are performed: if you work in State A on Monday and State B on Tuesday, each state can tax wages earned for the services performed within its borders.

Exception and complexity: Some states apply special rules. New York applies a “convenience of the employer” test for some telecommuters, which can tax nonresidents when work performed remotely is for the employee’s convenience rather than the employer’s business necessity (see New York Department of Taxation and Finance). Employers and payroll departments sometimes misapply rules, producing incorrect withholding.

Withholding: what employers do and where employees must act

Employers generally withhold taxes based on the employee’s reported work state(s) and the employer’s payroll setup. However, payroll systems may default to the employer’s state, especially for remote hires, so employees should confirm that the correct state withholding election is in place.

Employee actions:

• Review your state withholding elections and Form W‑4 or state equivalent.
• If your employer withholds the wrong state tax, request a correction and ask about adjusting payroll to the state where you live or perform services.
• If withholding cannot be changed promptly, plan for estimated tax payments or expect a refund/credit when you file.

Employers have separate obligations: withholding, registering for payroll tax in states where they have nexus, and complying with reciprocal agreements where they exist.

See FinHelp’s article on Handling Multistate Withholding for Telecommuting Employees for employer-side considerations.

Credits and avoiding double taxation

If two states tax the same wages, many states provide a resident credit for taxes paid to another state. Typically, you file a resident return first, then a nonresident return for the other state, and claim a credit on your resident return to offset taxes paid to the nonresident state. The credit reduces—but does not always eliminate—duplicate tax because of differences in tax rates and taxable income definitions.

Example: If you live in State R (taxes residents on worldwide income) and perform work in State W, you may owe tax to W as a nonresident on income sourced to W and report the full amount on your resident return to R while claiming a credit for tax paid to W.

FinHelp coverage of reciprocal agreements explains how some states instead allow workers to choose to be taxed only by their state of residence rather than the work state: How State Reciprocal Agreements Affect Multistate Employees.

Common remote-worker scenarios (practical examples)

1) Resident works remotely from State A for an employer located in State B, but performs all services in State A. State A taxes the resident on all income; State B generally should not tax wages if no services are performed in B. Still, some employers in State B might withhold B tax until presented proof of residency.

2) Resident of State R works some days in State S (onsite) and other days remote in R. Both states can claim tax on the portion of wages earned in their borders based on days worked; you’ll often file a nonresident return in the state where onsite days occurred and claim credit in your resident state.

3) Nonresident working remotely for an employer in New York: New York’s convenience-of-the-employer rule may subject nonresident wages to NY tax if the worker’s telecommuting is primarily for personal convenience rather than employer necessity. This rule is controversial and fact‑specific—consult the New York Department of Taxation and Finance guidance and a tax advisor.

Recordkeeping and documentation

Good records make multistate filing manageable and defensible during audits.

• Maintain a day-by-day work location log (date and state where services were performed).
• Keep employer communications about work location and any payroll withholding elections.
• Save copies of state withholding certificates, W‑4 and state equivalents, and pay stubs showing state withholding.
• Preserve proof of domicile (lease/mortgage, voter registration, driver’s license) if you change states.

Many states accept electronic logs or contemporaneous calendars; the essential point is contemporaneous, reliable evidence.

Steps to take now (checklist)

1. Determine your domicile and where you qualify as a statutory resident.
2. Track where you perform work daily for the tax year.
3. Review payroll withholding and state elections with your employer; request corrections if needed.
4. If multiple states are involved, estimate tax liability early and make quarterly estimated payments to avoid underpayment penalties.
5. When filing, prepare resident return first, then nonresident returns, and claim available credits.
6. Consult a tax professional experienced in multistate returns for complex cases.

Common mistakes to avoid

• Assuming your employer’s withholding automatically gets everything right.
• Ignoring state filing requirements for nonresident income when you have occasional workdays in another state.
• Failing to keep a contemporaneous work-day log—this is one of the most common audit pain points.
• Overlooking reciprocity agreements that could simplify withholding and filing.

Employer considerations that affect you

Employers may be required to register for payroll in states where they have nexus, withhold appropriate state taxes, and comply with reciprocal agreements. Large remote‑first employers should update payroll systems to allow employees to assert their work state and avoid miswithholding.

Where to get authoritative guidance

• Internal Revenue Service: https://www.irs.gov (federal rules and guidance).
• New York Department of Taxation and Finance: https://www.tax.ny.gov (see telecommuting and convenience-of-employer guidance).
• Consumer Financial Protection Bureau: https://www.consumerfinance.gov/consumer-tools/taxes/ (general consumer tax resources).

Also consult state revenue department websites for the states involved. FinHelp’s related articles include State Tax Residency Rules, How State Reciprocal Agreements Affect Multistate Employees, and Handling Multistate Withholding for Telecommuting Employees.

Short FAQs

• Can I be taxed by two states on the same wages? Yes—states can tax the same wages, but most resident states offer a credit for taxes paid to other states to reduce double taxation.
• Do I need to pay estimated taxes if withholding is wrong? Often yes—if withholding is insufficient or misallocated, make estimated payments to the correct state to avoid underpayment penalties.
• Who decides where income is sourced? State law decides; typically, it is where the services were physically performed.

Professional takeaway and next steps

In my experience working with clients on multistate issues, the most effective defenses to surprise tax bills are contemporaneous documentation, prompt communication with payroll, and early planning. If you split time between states or recently changed domicile, start tracking daily location now, review withholding with your employer, and consult a multistate tax professional to run projections before filing season.

Professional disclaimer: This article is educational and does not constitute individualized tax advice. For specific guidance tailored to your situation, consult a qualified tax advisor or state revenue department.