Background

Interstate telecommuting means an employee performs work in one U.S. state while their employer is located (or headquartered) in another. As remote work has grown, states have updated withholding guidance, but no single federal rule governs state withholding — each state sets its own requirements (see IRS.gov for federal withholding guidance and state contacts: https://www.irs.gov).

How state withholding typically works

  • Primary tests: states and employers usually look at (1) the employee’s state of residence, (2) the state(s) where the work is performed, and (3) the employer’s business location. These factors determine where income is sourced and which state may require withholding.
  • Employer obligation: employers generally must withhold for the state where wages are taxable under that state’s law. That may mean withholding for the employee’s resident state, the employer’s state, or both (multistate withholding).
  • Credits and returns: to avoid double taxation, many states allow a credit for taxes paid to another state on the same income, claimed when filing the resident state return.

Real-world examples (illustrative)

  • A telecommuter who lives and works in State A for an employer located in State B may owe State A income tax and possibly State B tax if State B asserts source rules for services tied to the employer’s location. The specific outcome depends on each state’s statutes and case law.
  • Reciprocal or convenience rules: some states have reciprocal agreements that exempt out‑of‑state worker withholding (commonly seen in neighboring states). Other states apply a “convenience of the employer” test that can treat remote work performed for an out‑of‑state employer as New York‑sourced income, for example — increasing that employer’s withholding exposure (see New York Department of Taxation and Finance: https://www.tax.ny.gov).

Who is affected

  • Full-time remote employees who cross state lines for residence or temporary work.
  • Employers with remote employees in multiple states; payroll teams must track multistate withholding obligations.
  • Contractors: state withholding rules for independent contractors differ from employee withholding and require separate rules and thresholds.

Common problems and mistakes

  • Assuming only the employee’s resident state matters — many employers and workers mistakenly think residency alone controls withholding. That can lead to underwithholding and penalties.
  • Not updating payroll after a move — mid‑year moves create split-year residency and withholding complications.
  • Overlooking state-specific tests (reciprocity vs. convenience-of-the-employer) and failing to collect employee withholding certificates where required.

Practical steps and professional tips

  1. Confirm employee work location(s) and residency in writing (W‑4 state equivalents, remote work attestations). Keep dated records of where work was performed.
  2. Review state rules for withholding and reciprocity. Where guidance is unclear, request written confirmation from the state tax agency or consult a tax advisor. Many states publish employer withholding guides (see state tax agencies and FinHelp’s roundup on state withholding rules).
  3. If multistate withholding happens, track taxes withheld per state; the employee may file for credits on their resident return to avoid double taxation.
  4. Consider payroll system updates or third‑party payroll providers that support multistate withholding and automated tax-registration workflows.

In-practice note

In my work advising employers, the most common resolution is timely communication and documentation: have employees complete the appropriate state withholding forms when they move or start remote work, and reclassify withholding as soon as the employer is aware of a change in work state. Small delays can create administrative headaches and audit risk.

Where to get authoritative guidance

Internal resources

FAQs (short)

Q: Can an employer withhold for two states on the same wages?
A: Yes. Some employers withhold for multiple states when both claim the wages are taxable. Employees typically resolve overlap at tax filing by claiming a credit for taxes paid to other states.

Q: What if my employer refuses to withhold for my resident state?
A: If you believe your resident state requires withholding, contact that state’s tax agency for guidance and consider filing estimated tax payments to avoid penalties.

Professional disclaimer

This article is educational and does not replace personalized tax advice. For specific withholding decisions and multistate filing strategy, consult a licensed tax advisor or your state tax agency.

Sources

  • IRS — Withholding: general resources (IRS.gov)
  • New York State Department of Taxation and Finance (tax.ny.gov)