Why this matters now

Remote and hybrid work arrangements created permanent changes in when and where income is earned. That change can create new state filing obligations for both workers and the companies that hire them. Failing to address those obligations can lead to payroll missteps, unpaid state income tax, penalties, and audits. In my practice advising employers and individual clients, proactive multistate planning often prevents months of remediation and materially reduces penalty exposure (see Multistate Tax Commission guidance: https://www.mtc.gov/).

Key concepts every remote worker and contractor should understand

  • Nexus: A state’s legal standard for when it can tax a person or business. Nexus is fact-specific and varies by state (see state guidance and the Multistate Tax Commission).
  • Residency: States use different tests—domicile, statutory residency (days present), and intent—to determine personal income tax residency.
  • Source rules: States tax income that is sourced to work performed in their jurisdiction. If you perform services physically in State A, that income is often sourced to State A.
  • Withholding vs. estimated payments: Employees generally rely on employer withholding. Independent contractors usually must pay state estimated taxes and may receive 1099-NEC income reporting.
  • Credits and reciprocity: Many states offer credits to avoid double taxation; some neighboring states have reciprocity agreements for withholding. Always verify with the state tax agency.

(Authority: IRS general tax guidance, Multistate Tax Commission, and state tax agencies such as New York State Department of Taxation and Finance and California Franchise Tax Board.)

Who is affected

  • W-2 employees who work from a state other than their employer’s payroll state.
  • Independent contractors and gig workers who perform services across state lines.
  • Employers with remote staff: they may have new withholding obligations and business tax nexus (payroll tax registration, unemployment insurance, and even corporate income/franchise tax exposure).

If you spend repeated or substantial time working in a state, or you maintain a home or regular business presence there, expect that state to assert taxing rights.

Typical state triggers and examples

  • Physical presence: simply working from a state (even temporarily) can create filing obligations for employees and withholding duties for employers.
  • Revenue or sales thresholds: for businesses, sales or revenue within a state create business nexus under economic nexus rules.
  • Employees creating payroll nexus: several states treat the presence of remote employees as establishing nexus for the employer (this affects payroll and, in some states, corporate tax).

Example A: An employer headquartered in Illinois has a software engineer who permanently remote-works from New York. New York may require the employee to file state income tax and may require the employer to withhold New York income tax and register for payroll taxes in New York (NY guidance: https://www.tax.ny.gov/).

Example B: A contractor who lives in Oregon provides services for a California company. If the contractor performs work physically in California or meets other nexus thresholds, California may require the contractor to file and pay state income tax (California FTB: https://www.ftb.ca.gov/).

Practical compliance steps for employees

  1. Track work location daily. Keep a simple spreadsheet or time log that shows where you worked on each day of the year. This is the single most useful record in multistate cases.
  2. Confirm residency status. Determine your domicile and whether you meet any statutory residency or day-count tests for other states.
  3. Update payroll for withholding. Notify your employer’s payroll team if you change your work location so they can withhold the correct state taxes or advise on required steps.
  4. File state returns where required. File resident, part-year resident, or nonresident returns as applicable; claim credits for taxes paid to other states when allowed.
  5. Consider estimated payments. If you are an independent contractor or have substantial non-wage income, make state estimated tax payments to avoid penalties.

Practical compliance steps for contractors and employers

  • Contractors: Treat state taxes the same as federal. Keep location logs, make quarterly estimated payments where required, and review state-level registration rules if you provide services repeatedly in a state.
  • Employers: Run a remote-employee nexus check. Register for payroll withholding in states where employees work, adjust unemployment insurance filings, and consult your payroll provider about multistate setups. Employers should also evaluate whether employee presence creates business nexus that affects income, gross receipts, or franchise taxes.

Record-keeping checklist

  • Daily location log (dates, cities, states).
  • Copies of state withholding forms or emails to payroll.
  • Home address documentation (lease, utility bills) to support residency claims.
  • Travel itineraries and client visit records.
  • Paystubs showing state withholding.

In practice I’ve seen the daily location log win audits when residency or sourcing is disputed. Keep records for at least three to six years.

Common pitfalls to avoid

  • Assuming your employer will automatically withhold the correct state tax. Payroll teams often need explicit notification of employee work locations.
  • Ignoring contractor status: contractors must often make their own state estimated payments.
  • Overlooking nexus for the employer: remote staff can create payroll and business tax registrations in unexpected states.
  • Relying on anecdotal “convenience of the employer” rules without checking the state’s law; only a few states (notably New York historically) have broad convenience rules that affect sourcing — always confirm current state law and guidance.

Credits, reciprocity, and double taxation

Most states allow a credit for income taxes paid to another jurisdiction when the same income is taxed by both states. The mechanics differ:

  • Resident-credit: your resident state typically gives a credit for taxes paid to other states on income sourced to those states.
  • Reciprocity and withholding: some states waive withholding for nonresidents or have reciprocity agreements; employees generally must submit the appropriate nonresident or reciprocity withholding form to their employer.

Because rules vary, always compute taxes under both states’ laws and claim allowable credits. If an employee is taxed by State A (where work is performed) and by State B (where they are resident), the resident credit usually avoids double taxation.

Dealing with audits and back taxes

If you discover you should have filed or had withholding in another state, do not ignore it. Mistakes can be corrected: many states offer voluntary disclosure programs or penalty relief options for taxpayers who proactively come forward. Consult a tax professional to evaluate options and to negotiate reasonable payment plans if necessary (see IRS and state agency guidance).

Example scenarios (brief)

  • Mid‑year move: You move permanently from State X to State Y in August. You will likely file a part‑year resident return in both states and apportion wages. Keep move documentation to support the residency change. (See our article on Tax Implications of Moving States Mid-Year: https://finhelp.io/glossary/tax-implications-of-moving-states-mid-year/.)

  • Frequent traveler: You live in State A but travel to State B frequently for client work. If the time in State B is substantial, expect nonresident filing requirements there and possible requirement for your employer to withhold.

Tools and resources

Helpful FinHelp articles:

Quick compliance checklist (action items)

  • Keep a daily work-location log.
  • Tell payroll immediately if you change work state.
  • Check if your employer must withhold in your work state.
  • Make estimated payments if you’re a contractor or have non-wage income.
  • File resident, part‑year, or nonresident returns properly and claim credits as needed.
  • Consult a multistate tax specialist when in doubt.

Frequently asked questions (brief answers)

  • Do I have to file in the state where my employer is located? Only if you earn income sourced to that state or if you are a resident there. Often you file in the state where you work or where you are resident.
  • Are contractors treated differently? Yes. Contractors usually handle their own withholding and estimated payments and are subject to state income sourcing rules.
  • Can an employer make a mistake for me? Yes — employers can misapply withholding. If that happens, communicate with payroll promptly and keep copies of all notices and paystubs.

Professional disclaimer

This article is educational and does not replace personalized advice. State rules are fact-specific and change frequently; consult a qualified tax advisor or the relevant state tax agency for guidance tailored to your situation.

Sources and further reading

If you’d like, I can create a tailored checklist or a sample work-location log template you can use for compliance.