Background
Remote work expanded multi-state payroll obligations. Historically, withholding followed the employer’s business location; today many states require withholding based on the employee’s residence or where services are performed. State rules can include residency tests, reciprocity agreements, and ‘‘convenience of the employer’’ standards that change how wages are taxed.
How payroll withholding works for remote employees
- Identify the applicable state(s): determine the employee’s state of residence and the state(s) where work is performed. Some states tax based on residence; others tax where the work is done.
- Register and report: if a state requires withholding, register for an employer withholding account in that state and file required returns.
- Withhold appropriate taxes: calculate federal (income tax, FICA) and state/local withholding per the employee’s status and state rules.
- Remit and reconcile: deposit taxes on the required schedule and reconcile at year-end (W-2s, state equivalents).
Practical checklist for employers
- Confirm employee residence and regular work location; document any temporary moves.
- Check for reciprocity agreements (e.g., some neighboring states exempt nonresident withholding). See state reciprocity lists at the National Conference of State Legislatures.
- Register for withholding accounts in states where you have withholding obligations.
- Collect state-specific withholding forms (if applicable) and maintain time records when employees split work between states.
- Use payroll software or a PEO that supports multi-state withholding and keeps up with rule changes.
In my practice I’ve seen employers avoid audits by keeping a simple remote-work log showing days worked in each state—this is often the deciding evidence if a state challenges withholding.
Common state rules and traps
- Residence-based withholding: Many states tax residents on all income, no matter where earned.
- Worksite-based withholding: Some states tax wages earned for services performed within the state, even for nonresidents.
- Convenience-of-the-employer rule: A few states (notably New York) apply taxes based on whether an employee’s remote work is for their convenience rather than the employer’s business needs; this can mean withholding for the employer’s state despite the employee living elsewhere.
- Reciprocity: Some states exempt nonresidents who work across the border if the states have a reciprocity agreement—confirm with state DOR rules.
Real-world examples
- New York vs. Florida: A Florida-based company with an employee living in New York must generally withhold New York income tax because New York taxes residents and may apply sourcing rules for work performed in-state. Florida has no state income tax, so the employer’s Florida location does not remove the New York withholding obligation.
- Temporary relocations: If an employee moves temporarily to California for several months, the employer may need to withhold California taxes for wages earned while resident or performing services there.
Quick table (illustrative only)
| State example | Typical rule |
|---|---|
| California | Withhold if employee is resident or works in CA; strong sourcing rules |
| Texas/Florida | No state income tax — generally no state income withholding required |
| New York | Resident and worksite rules; convenience-of-the-employer may apply |
Common mistakes
- Assuming the employer’s state controls withholding for all remote employees.
- Ignoring local taxes (city or county withholding).
- Failing to register in a state quickly after an employee relocates.
- Not tracking days worked in each state when employees split time across jurisdictions.
State action steps (practical guidance)
- Review each remote employee’s tax residency and work pattern; update HR records.
- Contact the state Department of Revenue for registration and employer withholding guidance.
- Configure payroll systems to apply correct withholding schedules and deposit frequencies.
- Document decisions and keep records (time logs, agreement letters) to support withholding positions during audits.
When to get professional help
If employees work in multiple states, or you face complex rules (convenience tests, reciprocity, or nexus issues), consult a CPA or payroll attorney. These rules can trigger registration, unemployment tax, and workers’ compensation changes in addition to income tax withholding.
Related FinHelp resources
- See our Tax compliance checklist for remote-first startups for a step-by-step guide to payroll registration and nexus issues: Tax compliance checklist for remote-first startups: Payroll, Nexus, and Withholding.
- For gig- and multi-state worker rules, see: Multistate Gig Work: Where to Pay Income and Payroll Taxes.
- Avoid common employer mistakes by reviewing: Avoiding Common Payroll Tax Compliance Mistakes for Small Employers.
Authoritative sources and where to check rules
- IRS — employer obligations and FICA rules; see Publication 15 (Employer’s Tax Guide) and irs.gov for federal guidance.
- National Conference of State Legislatures (NCSL) — summaries of state taxation and reciprocity.
- State Departments of Revenue — for state-specific withholding forms and guidance.
Professional disclaimer
This article is educational and not personalized tax advice. Rules change and facts matter; consult a qualified tax professional or your payroll provider for guidance tailored to your situation.
