Overview

Remote work has increased multistate tax exposure: several states can claim the right to tax the same income. States generally use three tools to decide residency for tax purposes: statutory/physical‑presence tests, domicile analysis, and income‑sourcing rules. Understanding how each works — and documenting facts — is the core of risk management for remote employees and contractors.

Key tests states use

  • Physical‑presence (statutory) tests: Many states treat someone as a resident for tax purposes if they spend a specified number of days in the state during the tax year (commonly 183 days, but the threshold and counting rules vary). Relying only on a day count can be risky because some states add tie‑breaker rules or count days differently (e.g., partial days, travel to work).
  • Domicile test: Domicile focuses on where you maintain your permanent home and your intent to remain there. Evidence includes where you vote, where your driver’s license and vehicle are registered, family and business ties, and where you keep personal property.
  • Sourcing of compensation: States also apply rules that determine where wages were “earned.” Some states tax income earned while physically working in the state even if the employer is located elsewhere; other states look to the worker’s residence.

Practical examples (common scenarios)

  • Moving states midyear: A remote worker who moves from State A to State B during the year may be a part‑year resident in both states and must file accordingly. Allocation rules determine what income each state taxes.
  • Working for an out‑of‑state employer while living elsewhere: Even if your employer is in State X, you can owe tax to State Y if you are a resident there or if State X taxes wages sourced to work performed in X.

What to document (checklist)

  • Daily location log: record where you work each day (for hybrid or frequent travelers). This is the single most useful piece of evidence in audits.
  • Residential ties: leases, mortgage statements, utility bills, voter registration, driver’s license/DMV records, and vehicle registration.
  • Employment records: payroll withholdings, telework agreements, and employer policies on work location.
  • Communications: dated emails confirming remote work arrangements, travel approvals, and office access records.

Filing and tax consequences

  • Part‑year and nonresident returns: Many taxpayers end up filing multiple state returns (resident, part‑year, or nonresident). States often allow credits for taxes paid to another state on the same income, but rules and limitations differ.
  • Withholding and estimated tax: Update your employer’s payroll withholding if your work location changes. Employers can be slow to adjust — track pay stubs and W‑4 state equivalents.
  • Local taxes and reciprocity: Some localities (cities, counties) or states have reciprocity agreements that limit withholding, but those are limited and specific.

Employer responsibilities and evolving law

Employers may have withholding, payroll‑tax, and nexus obligations when employees work from other states. Since state guidance evolved rapidly after 2020, organizations should coordinate HR, payroll, and tax teams to keep policies and withholding up to date.

Common pitfalls and how to avoid them

  • Not tracking days: Failure to keep a log is the top reason remote workers lose residency disputes.
  • Ignoring non‑resident filing obligations: Even small amounts of in‑state source income can trigger a return requirement.
  • Keeping strong ties to an old state: Maintaining a home, voter registration, or a driver’s license in State A after claiming residency in State B undermines your position.

Professional tips (from practice)

In my practice advising clients on moves and remote work, the most effective steps are simple and verifiable: change your driver’s license and voter registration when you relocate; close or rent out the old residence; and keep a dated travel log. When feasible, get written confirmation of telework arrangements from the employer and update payroll withholding promptly.

Resources and next steps

  • For state tests and guidance: consult your state’s Department of Revenue website and the Multistate Tax Commission for comparative guidance (Multistate Tax Commission).
  • For general federal context and multistate summaries: Tax Policy Center and individual state tax pages provide useful primers (Tax Policy Center; state revenue sites).

Further reading on FinHelp.io

Final notes and disclaimer

This primer explains common state residency concepts for remote workers but is not legal or tax advice. State rules change and facts matter — consult a qualified tax professional for guidance tailored to your situation. Authoritative sources include state revenue departments and multistate guidance from the Multistate Tax Commission and federal summaries from the Tax Policy Center.