Navigating State Withholding When Employees Split Time Across States

Why this matters

Employers that fail to withhold the correct state income tax when an employee splits time across states risk payroll penalties, interest, and unhappy employees who face unexpected tax bills. In a distributed workforce, even occasional days worked in another state can create withholding obligations or reporting duties. This guide explains practical steps employers should take and the rules that typically apply.

Key concepts employers must understand

• Resident vs. nonresident taxation: Most states tax residents on all income regardless of where it’s earned; nonresidents are taxed only on income sourced to the state (wages for work performed there).
• Source rules: States generally source wage income to the state where the services are performed. If an employee works physically in State A two days per week and State B three days, both states may claim part of the income.
• Reciprocity: Some neighboring states have reciprocity agreements or special rules allowing residents to be taxed only by their home state. Reciprocity is state‑specific and optional; employers and employees must follow the states’ forms and procedures.
• Convenience and telework rules: A small number of states (notably New York) apply the “convenience of the employer” test to determine sourcing of telecommuter wages; this can result in a state taxing wages even if the employee worked remotely from another state.

Sources: IRS employer guidance (Publication 15), state tax departments, and the National Conference of State Legislatures (NCSL) state tax summaries (see: https://www.irs.gov/; https://www.ncsl.org/).

Practical, step‑by‑step approach for employers

1. Confirm the employee’s state residency and primary worksite. Residency drives tax credits and reporting responsibilities; primary worksite influences sourcing.

2. Track days and locations worked. Implement a simple daily logging system (timesheets, calendar export, or geo‑stamp check‑ins). Accurate records are the single most defensible position in the event of a state audit.

3. Check state withholding rules and registrations. If employees work in a state more than occasionally, you may need to register to withhold and remit in that state and to file withholding returns. Payroll vendors can often register employers in additional states for a fee.

4. Evaluate reciprocity and special rules. Look up whether the states involved have a formal reciprocity agreement or specific telecommuting sourcing rules. Do not assume reciprocity exists—verify it on the state tax website or the NCSL reciprocity database (https://www.ncsl.org/).

5. Decide withholding method. Common approaches include:

• Withhold by actual days worked: Allocate wages to states based on the proportion of days/services performed there.
• Withhold to resident state with employee election: In limited cases with reciprocity, withhold only for the resident state if the employee files the required exemption form.
• Withhold in every state with subsequent employee credit: Withhold where earned and let the employee claim a credit on their resident return to avoid double taxation.

1. Update payroll systems and employee forms. Federal W‑4 controls federal withholding only; many states have their own withholding certificates. Make sure employees complete any required state withholding forms and that payroll is configured correctly.

2. Communicate with employees. Explain expectations, ask employees to report work locations promptly, and provide safe harbor guidance about what will be withheld.

3. Reconcile at year‑end. Ensure W‑2s show wages and state withholdings accurately. If withholding was incorrect, correct payroll, issue amended W‑2s, and consult payroll counsel to address potential employer liabilities.

Common employer mistakes and how to avoid them

• Assuming federal W‑4 covers state withholding. It doesn’t; states often have separate forms and rules.
• Ignoring occasional workdays. Even a few days in another state can create an obligation to withhold or file returns.
• Failing to register in a state where employees performed services. States expect employers to register and remit when they have withholding obligations.
• Relying solely on employee declarations. Employers are ultimately responsible for correct withholding; accurate internal tracking is required.

Payroll logistics and configuration tips

• Use payroll vendors with multi‑state capability. That reduces admin burden and helps ensure tax tables and filing frequencies are correct.
• Automate location tracking where feasible. For hybrid teams, tie physical office check‑ins or VPN access logs to work‑location records.
• Set default withholding rules, then override when employees report alternate schedules. Defaults reduce human error.
• Budget for administrative costs. Multi‑state withholding increases payroll complexity and vendor fees.

How employees typically resolve double taxation concerns

When a nonresident state withholds tax, the employee’s resident state usually provides a credit for taxes paid to other states to avoid double taxation. Employers should not rely on the resident credit to justify underwithholding; the withholding obligation still rests with the employer in the state where the work was performed.

Special situations

• Temporary assignments and travel: Short business trips usually do not trigger employer withholding registration in a state, but frequent travel or a temporary assignment of weeks or months might. Check the state’s thresholds and nexus rules.
• Remote work across state lines after a move: If an employee moves residence, update withholding promptly and consider retroactive adjustments where appropriate. See our guidance on handling multi‑state payroll after a move: Handling Multi‑State Payroll Withholding After an Employee Move.
• Gig workers and contractors: Independent contractors are generally responsible for paying their own estimated taxes; however, misclassification can create employer withholding liabilities. Review classification carefully.

Examples that reflect common outcomes

• A remote developer lives in State X but works onsite three days a week in State Y. Employer withholds State Y tax for those onsite wages and State X for wages earned in State X; the employee claims a resident credit on State X’s return for taxes paid to State Y.
• An employee lives in a state with reciprocity with the neighboring state and files the local reciprocal exemption form. Employer withholds only for the resident state, per the reciprocal agreement—if and only if the employee completes the required documentation.

Resources and authoritative references

• IRS, Employer’s Tax Guide, Publication 15 (for federal payroll reporting and W‑2 rules): https://www.irs.gov/publications/p15
• National Conference of State Legislatures (state reciprocity and remote work resources): https://www.ncsl.org/
• State tax departments (search the department of revenue/department of taxation for the states involved for specifics on withholding forms and telecommuting rules).

Additional practical checklist on remote employee withholding and common payroll configurations is available in our companion piece: State Tax Withholding for Remote Employees: Practical Checklist.

Compliance risks and employer liability

Employers that fail to withhold correctly may face state assessments for unpaid withholding, penalties, and interest. States can audit payroll records and demand unpaid taxes from the employer and, in some cases, from the employee. Proper registration, timely withholding, and clear documentation substantially reduce these risks.

Recommended best practices (quick reference)

• Maintain daily location records for hybrid/remote staff.
• Register to withhold in any state where employees regularly perform services.
• Use payroll partners with multi‑state expertise.
• Require employees to complete required state withholding certificates when applicable.
• Review and update withholding when employees change schedules, move, or accept temporary assignments.

Professional disclaimer

This article is educational and reflects common rules and best practices for state withholding as of 2025. It is not personalized tax or legal advice. Employers should consult a qualified payroll tax professional or state tax counsel for specific situations and to confirm current state rules and reciprocity agreements.