What Do Remote Workers Need to Know About State Residency and Employer Withholding?

Remote work has made state tax rules more important — and more complicated — for employees and employers. State residency rules decide which state can tax your wages; employer withholding is how those taxes are collected during the year. If you live in one state and your employer is in another, you and your employer must understand how both states treat residency, withholding, and credits to avoid double taxation or under-withholding.

This article summarizes the rules, shows practical steps for employees and employers, and explains common traps I see in practice from more than 15 years of advising taxpayers and businesses.

Why this matters now

  • States use different tests (domicile, statutory residency, days-present tests) to determine who they can tax.
  • Employers generally must withhold based on the employee’s work location — but states differ on whether payroll should follow the employee’s residence or the employer’s location.
  • Mismatches create tax filings in multiple states, potential refunds delays, and, in some cases, audits or penalties.

(Authoritative guidance: see IRS guidance on federal withholding and Form W-4 procedures and state tax pages for residency and withholding rules; e.g., New York State guidance on the “convenience of the employer” rule.)

Sources: IRS (Form W-4 guidance), New York State Department of Taxation and Finance (withholding rules), Multistate Tax Commission and state revenue departments for specific state policy details.

Core concepts (plain language)

  • Domicile: Your permanent legal home — where you intend to return. Domicile matters for long-term residency disputes.
  • Statutory residency: Some states call you a resident if you spend a threshold number of days in the state (commonly 183 days or similar) and maintain a permanent place there.
  • Work-source withholding: Employers typically withhold state income tax where wages are earned or where the employee performs services. A remote worker’s location often controls.
  • Reciprocity and credits: States sometimes have reciprocal agreements that let you pay tax only where you live or work; otherwise you may claim a credit on your resident return for taxes paid to another state to avoid double taxation.

Common state rules and special tests

  • Many states use a combination of domicile and days-present tests. The common 183-day rule is a rule of thumb, but states vary in how they count days and how they treat presence for part-year or temporary moves.
  • New York and a few other states apply a “convenience of the employer” test for telecommuters, which can tax remote workers if the remote work is for the employee’s convenience rather than the employer’s necessity. (See New York State Department of Taxation and Finance.)
  • Reciprocal agreements exist between some neighboring states so commuters pay tax only to their state of residence. These are limited; always check the specific state revenue site.

Practical steps for remote employees (checklist)

  1. Confirm your state residency status
  • Gather objective ties to the state: driver’s license, voter registration, primary residence/lease, family location, and where you spend most nights.
  • Keep a contemporaneous day count (date-stamped calendar, travel logs, or time-stamped remote-access records).
  1. Tell payroll immediately when you change your residence or work location
  • Provide updated state withholding forms the employer requests. Don’t rely on HR to detect the move.
  1. Check employer withholding and your paystubs
  • Verify that state tax is being withheld for your state of residence (or the correct work state) each pay period.
  1. Track multistate withholding and plan filings
  • If tax was withheld to the wrong state, you may need to file a nonresident return there to claim a refund and file a resident return to report all income and get a credit for taxes paid to other states.
  1. Consider estimated tax payments if you expect under-withholding
  • For complex arrangements or splits across states, quarterly estimated payments can avoid underpayment penalties.
  1. Keep documentation to support your residency claim
  • Utilities, lease agreements, ballots, medical records, evidence of where your family lives, and day-count logs matter if a state questions your residency.

In my practice I’ve seen workers who moved and assumed payroll would update automatically — that assumption causes the most preventable headaches.

Practical steps for employers (payroll & HR checklist)

  1. Build a reliable process for employees to update work location
  • Accept written notifications and require a state withholding form (or equivalent) when location changes.
  1. Configure payroll systems for multistate withholding
  • Modern payroll systems can handle multiple state withholding rules; ensure the system applies the correct rules for each pay period.
  1. Know special-state rules (e.g., convenience test)
  • If you have telecommuters in New York, or other jurisdictions with special sourcing rules, ask payroll counsel or state revenue for guidance.
  1. Correct mistakes quickly
  • If you withheld for the wrong state, file corrected W-2s and amend payroll tax returns where needed. Encourage employees to file the nonresident return to claim refunds promptly.
  1. Maintain records
  • Keep copies of employees’ withholding elections and location-change notices for audit defense.

Employers face nexus and withholding obligations in states where employees perform services. When in doubt, consult payroll counsel or a multistate tax advisor.

Examples that illustrate common outcomes

  • Example A — Employee lives in Texas (no state income tax) and works for a company headquartered in New York. If the employee performs all work from Texas, payroll generally should not withhold New York resident taxes — but New York’s telecommuter sourcing rules can apply if the worker performs services tied to New York clients or is considered working in New York under the convenience test. The employee should provide the correct state-withholding documentation and keep records showing the Texas work location.

  • Example B — Employee lives in California and works remotely for an Oregon employer. California taxes residents on worldwide income, so the employee will generally owe California tax and should ensure California withholding. The employer should withhold based on the employee’s work location if payroll rules require it.

  • Example C — Employee temporarily works in State B for a few months. The employee may be a part-year resident or nonresident of State B during that period. Track days there and consult State B’s rules about part-year residency and nonresident withholding.

How to fix withholding errors

  1. Notify payroll and request corrected withholding going forward.
  2. If incorrect amounts were withheld to the wrong state, file a nonresident return in that state to claim a refund.
  3. File your resident return and claim a credit for taxes paid to other states if available.
  4. If the employer made reporting mistakes on W-2s, ask for a corrected W-2 (Form W-2c).

If you and your employer can’t agree on the right withholding, contact the state revenue department for guidance and document your communications.

Common misconceptions

  • “If I never set foot in the employer’s state, I won’t owe its tax.” Not always true — some states tax based on employer location for certain sourced income or apply special telecommuting rules.
  • “My payroll will automatically know where I live.” Payroll needs accurate data from you; many withholding mistakes are a communication failure.

Resources and next steps

  • IRS: guidance on federal withholding (Form W-4 and withholding procedures) — see the IRS website for current federal rules.
  • New York State Department of Taxation and Finance: guidance on telecommuters and the convenience of the employer rule.
  • State revenue department website for your residence and employer states — search for “residency” and “withholding” on each site.

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Professional disclaimer: This article is educational and does not constitute tax, legal or accounting advice. State rules change and facts differ by situation. Consult a CPA or multistate tax advisor for tailored guidance.

If you’d like help with a specific scenario, gather your dates of move, paystubs, W-2s and state withholding forms before speaking with a tax professional — those documents materially speed up analysis and resolution.