State Income Tax Withholding for Remote Workers: Employer Obligations

Why this matters

Remote work changes where income is earned and which states can tax wages. If employers don’t correctly determine an employee’s work location and apply the proper state withholding rules, they can face back taxes, interest, and penalties — and create unexpected payroll burdens for employees. In my work advising more than 500 employers, the most common failures stem from not documenting employees’ work locations and not registering in states early enough.

Quick checklist for employers

• Confirm the employee’s primary work location and residence.
• Review the destination state’s withholding rules and registration thresholds.
• Register for employer withholding and unemployment accounts where required.
• Configure payroll software for state- and locality-specific rates.
• Inform employees about changes and collect required state withholding forms.
• File withholding tax returns and remit payments on the state’s schedule.

How employer obligations typically work (step-by-step)

1. Determine the controlling state for withholding

• Start with the employee’s physical work location. Most states require withholding based on where the employee performs the work or where they reside. Some states use a residency test, others a situs-of-work test; still others have special rules for telecommuters. Document the employee’s primary work address and, if applicable, any hybrid/work-from-home schedule.

1. Check for reciprocal agreements or special rules

• Several states have reciprocal agreements or special telecommuting guidance that can change withholding obligations (for example, certain residents working across state lines may be exempt from the employer withholding requirement of the work state). Check state revenue department guidance or your payroll provider’s notes. See the FinHelp guide on understanding nexus and reciprocity for details: Understanding State Income Tax Nexus for Remote Workers.

1. Register as an employer in the state

• If the state expects withholding from wages paid to an in-state worker, you’ll typically have to register for withholding and possibly unemployment insurance accounts. Register before paying wages or as soon as you hire the employee. For a stepwise how-to on registration, see: State Taxation of Remote Workers: Employer Registration Steps.

1. Collect state-specific withholding information

• Some states require completion of a state withholding certificate (similar to the federal Form W-4) or a state addendum. Ask employees to complete these forms and keep them in payroll files. If the employee moves to another state, collect updated forms immediately.

1. Set up payroll and withhold correctly

• Configure payroll software with the correct rate, exemptions, and local taxes. Confirm tax tables and deposit schedules — some states require electronic deposits for employers that exceed low thresholds, and deposit frequency can be monthly, semi-weekly, or quarterly.

1. File returns and remit taxes

• File withholding returns according to the state’s schedule. Many states require quarterly returns, some require monthly filing, and annual reconciliation returns are common. Make sure payments are timely to avoid interest and penalties.

1. Reconcile and report on annual filings

• Prepare annual reconciliation returns and provide employees with required statements (for example, state W-2 reporting on state copies). Keep records for at least the time period the state prescribes for audit purposes (usually 3–7 years).

Common employer scenarios and how to handle them

• Employee permanently moves to another state: Reassess withholding the employee’s new state of residence, collect any required state withholding forms, and register in the new state if needed.
• Employee works remotely while visiting other states: If an employee temporarily works in another state, withhold according to that state’s rules if the time spent creates filing obligations. Some states have short-day exemptions; others tax any income earned while physically present.
• Hybrid workforce across multiple states: Track days worked in each state if required by local rules. Accurate time and location tracking reduces audit risk.

Practical payroll setup tips

• Use geo-aware payroll software that automatically applies state and local tax rules.
• Maintain an employee location file with signed attestations of where work is performed and when changes happen.
• Automate new-hire registration and tax registration checks whenever you add a remote employee.
• Work with a payroll service or PEO when hiring employees across many states to centralize compliance.

Penalties, audits, and employer liability

States enforce withholding obligations aggressively because withheld taxes are easier to collect than unpaid income tax at audit. Common consequences for noncompliance include:

• Liability for unpaid withheld amounts plus interest.
• Penalties for late or incorrect deposits (often a percentage of unpaid tax).
• Penalties for failure to file or furnish required statements to employees.
• Payroll tax liens or other collection actions in severe cases.

To limit exposure, maintain contemporaneous documentation of employee locations, withhold correctly, and respond promptly to state notices. When my clients received notices, prompt voluntary disclosure and corrected returns often reduced penalties.

Multi-state allocation and credits

If an employee owes tax to his/her resident state for income earned while working for an out-of-state employer, many resident states allow a credit for taxes paid to another state to avoid double taxation. The mechanics differ by state; employers should:

• Withhold in the state of work where required.
• Inform employees to claim credits on their resident-state returns where eligible.
• When in doubt, recommend employees consult a tax preparer familiar with multi-state rules.

Documentation employers should keep

• Employee work-location attestations and change notices.
• Copies of state withholding certificates and W-4 equivalents.
• Registration confirmation numbers from state agencies.
• Proof of deposit and copy of filed returns.
• Payroll journals showing gross wages and state withholding.

Example (short)

A Delaware-based company hires a software developer who moves to California and works exclusively from home. Because California taxes resident wages, the employer must register with the California Franchise Tax Board (FTB) or state employment tax agency, withhold California personal income tax from wages, remit deposits on the FTB schedule, and file California withholding returns — even though the employer’s payroll operations are in Delaware.

Common mistakes to avoid

• Assuming remote employees are taxed only by the employer’s state.
• Waiting to register until after the first audit notice arrives.
• Not collecting updated withholding forms when employees move.
• Overlooking municipal or local taxes (e.g., certain cities impose local income tax).

Questions to ask when onboarding a remote employee

• Where will the employee physically perform their work most of the time?
• Will the employee travel frequently to other states for work?
• Has the employee completed state withholding certificates for their resident/work state?
• Do we need to register for withholding and unemployment insurance in the new state?

When to get professional help

• You have employees in five or more states (complex multi-state filing).
• A state has issued a liability assessment or audit notice.
• Your payroll provider can’t handle local tax rules or reciprocal agreements.

Additional resources and further reading

• IRS Publication 15 (Circular E) — Employer’s Tax Guide for federal payroll rules (see IRS.gov). (IRS guidance is federal; state withholding is state-specific.)
• For state-by-state steps on employer registration, see our guide: State Taxation of Remote Workers: Employer Registration Steps.
• For background on nexus, residency, and state sourcing rules, see: Understanding State Income Tax Nexus for Remote Workers.

Professional disclaimer

This article is educational and reflects general best practices as of 2025. It does not replace personalized legal or tax advice. Employers should consult a qualified tax professional or attorney before making compliance decisions specific to their situation.

Sources and authoritative references

• IRS Publication 15, Employer’s Tax Guide (for federal payroll withholding basics) — IRS.gov
• State department of revenue websites for state-specific withholding rules (varies by state) — see your state revenue agency.
• Multistate Tax Commission and state reciprocity guidance for cross-border worker rules.

(If you need a compliance checklist I can adapt to your payroll platform or review a sample employee roster to identify registration needs.)