Quick overview

Remote work blurred traditional residency and presence rules, so states use nexus tests to decide if they can tax you. Nexus affects three main areas for remote workers: state income tax filing, employer withholding duties, and business registration or sales tax requirements for freelancers and contractors.

(Author’s note: In my practice advising over 500 clients since 2010, I regularly see under-withheld wages and missed nonresident filings that create interest and penalties. Early review avoids most problems.)

How do states decide nexus for remote workers?

States use several common tests to establish nexus for income or withholding purposes. Each state writes its own rules, so outcomes differ. Common factors include:

  • Physical presence: Performing work from within a state, even temporarily, can create nexus for that state to tax wages earned while present.
  • Employer connection: If your employer has a payroll or office in a state, that state may require withholding for wages earned there.
  • Source-of-income rules: States tax income sourced to work performed in the state, not just where the employer sits. Nonresidents generally pay tax on income earned inside the taxing state.
  • Special doctrines: Some states (notably New York) apply a “convenience of the employer” rule, which can tax nonresidents when the out-of-state work is for the employee’s convenience rather than the employer’s business necessity.

Authoritative sources: National Conference of State Legislatures (NCSL) state roundups and individual state revenue department guidance are primary references for state-by-state rules; the IRS provides federal tax context but not state nexus rules (NCSL; state revenue sites). Always check the taxing state’s official guidance.

How income tax nexus differs from sales tax nexus

People often confuse sales tax (economic nexus) with income tax nexus.

  • Sales tax nexus (post-Wayfair) is usually triggered by economic activity thresholds (e.g., $100,000 in sales or 200 transactions in many states for remote sellers). This matters to businesses selling goods or software.
  • Income tax nexus for individuals focuses on where work is performed and residency status, and on withholding obligations for employers.

Both are important for remote workers who sell products or services as independent contractors, but the triggers and thresholds are different. See our article on “State Sales Tax Nexus” for details and thresholds.

Practical examples

Example 1 — Single remote employee

Lisa lives in Colorado and works full time from home for a company headquartered in New York. Colorado taxes her as a resident on worldwide income, so she files a Colorado resident return. New York may tax the portion of her salary attributable to services performed in New York if Lisa physically works there on some days or if New York applies its convenience rule. Lisa should check New York guidance and claim a credit on her Colorado return for taxes paid to New York to avoid double taxation.

Example 2 — Traveling contractor

Carlos is a freelance developer who travels and works in multiple states. Each state where he performs work can potentially assert nexus and tax the income earned there. Carlos keeps a work log showing dates, locations, and clients. That record made it straightforward for me to prepare nonresident returns and apply tax credits or allocate income properly.

Who is most affected?

  • Full-time remote employees who live in a different state than their employer.
  • Hybrid workers who occasionally perform services in other states.
  • Freelancers and independent contractors who sell services or digital goods across state lines.
  • Employers with remote teams who must determine withholding and payroll registration obligations.

Step-by-step checklist to evaluate nexus (practical compliance steps)

  1. Determine your state of residence and work locations. Your state of residence generally taxes your worldwide income.
  2. Identify each state where you performed work and for how many days. Keep contemporaneous logs (dates, tasks, client or employer name, location).
  3. Review the taxing state’s rules for nonresident wages. Look specifically for any convenience-of-the-employer rules, statutory sourcing tests, or exemptions for remote work.
  4. Check your employer’s withholding: Is it withholding for your resident state or for the employer’s state? Ask payroll to update withholding if necessary.
  5. If taxed by more than one state, determine if you can claim a credit on your resident return for taxes paid to other states, or if a reciprocal agreement applies.
  6. For contractors, check whether you must register as a nonresident business or collect sales tax in states where you have clients.
  7. Consult a tax professional before filing multiple state returns; small differences in state statutes can change outcomes.

Withholding, credits, and reciprocal agreements

  • Withholding: Employers should withhold in the state required by law, which is often the employee’s state of residence or the state where services are performed. Mistakes are common when payroll is centralized in another state.
  • Resident credit: Most states provide a credit to residents for income taxes paid to another state on that same income. This generally prevents double taxation but requires filing both the nonresident and resident returns.
  • Reciprocal agreements: Some neighboring states have reciprocal arrangements where residents don’t have to file nonresident wage returns (common in Mid-Atlantic and Midwest markets). Check state revenue sites to confirm.

Record-keeping and documentation

Good records reduce risk and simplify multistate filings. Keep:

  • Daily work-location logs (city, state, dates).
  • Client or employer communications that confirm work location or assignment.
  • Payroll notices or withholding statements showing state withholdings.
  • Travel itineraries that support occasional in-state work.

I recommend keeping these records for at least three years after filing, consistent with typical IRS and state statute of limitations guidance.

Common pitfalls and how to avoid them

  • Assuming residency equals the only state you must file in: Nonresident sourcing rules can still require filings elsewhere.
  • Ignoring temporary assignments: Short-term work in another state can create filing requirements.
  • Overlooking employer withholding errors: Ask payroll for a state withholding review if you move.
  • Treating sales tax and income tax nexus the same: They are distinct legal concepts with different rules.

When to get professional help

If you have any of the following, consult a CPA or tax attorney:

  • Multiple states involved for the same tax year.
  • High-income or complex allocation questions.
  • New remote-work policies at your employer that change withholding.
  • Disagreements with a state revenue department about sourcing or the convenience rule.

In my experience, early consultation (before year-end or before entering a new remote-work state) prevents most audit and penalty issues.

Useful resources

  • National Conference of State Legislatures (NCSL) — state-by-state tax summaries and recent legislation.
  • State revenue department websites — authoritative guidance and forms for nonresident returns.
  • IRS — federal tax filing guidance and background on residency definitions (note: the IRS does not set state nexus rules).

For deeper reading on related topics, see these FinHelp guides:

Final takeaways

Nexus for remote workers is fact-specific and state-specific. Track where you work, confirm employer withholding, check for reciprocal agreements or credits to avoid double taxation, and get professional help when multiple states or high-dollar issues are involved. Staying proactive will minimize surprises and keep you compliant.

Professional disclaimer

This article is educational and does not substitute for personalized tax advice. State rules change frequently; consult a licensed tax professional or the relevant state revenue department for current, case-specific guidance.