What should employers know about state tax withholding for remote employees?

Remote work changed how payroll teams handle state withholding. Employers must match withholding obligations to the employee’s work location, residency rules, and each state’s statutes. Get the right setup up front to avoid payroll errors, registration headaches, and potential penalties.

This checklist organizes the core compliance steps, documentation practices, and practical strategies I use in practice when advising employers and HR teams. It also links to related FinHelp articles for deeper guidance on nexus and residency planning.

Quick summary of key concepts

  • Withholding is generally tied to where the employee performs work and where they are a resident; states differ in tests and exceptions (residency, statutory employer nexus, telecommuting day apportionment).
  • Employers may need to register to withhold in multiple states and file state withholding returns even if payroll remains in the employer’s home state.
  • Reciprocal agreements and convenience-of-the-employer rules affect who taxes income — check both states’ rules.

Authoritative resources: IRS guidance on withholding and estimated tax (Publication 505) and state tax agency pages; Multistate Tax Commission and Tax Foundation summaries are helpful for cross‑state comparisons (see resources at the end) IRS: Tax Withholding and Tax Foundation: Remote Work State Taxes overview (accessed 2025).

Related FinHelp content: see our guide on State Nexus Checklist for Out-of-State Remote Employees and the overview on Multistate Tax Compliance for Remote Employees and Contractors, plus strategies in State Residency Strategies for Remote Workers.

Practical compliance checklist (step-by-step)

  1. Confirm employee work locations and residency
  • Collect current home address and primary work location at hire and after any move. Require employees to update HR immediately on changes.
  • Maintain a signed acknowledgement of primary work location and the effective date—this is vital support during audits.
  1. Map state withholding obligations
  • For each employee, determine: state of residence; state(s) where work is performed; and employer’s state(s).
  • Check for special rules: convenience-of-the-employer doctrines (NY, PA and others), day-count apportionment, and telework agreements.
  • Determine if reciprocal agreements apply (common among neighboring states).
  1. Register in required states
  • If withholding is required in another state, register the employer for withholding tax in that state before payroll runs there.
  • Also register for state unemployment insurance and payroll reporting if hiring creates nexus. Failure to register timely can trigger penalties and interest.
  1. Update payroll systems and state withholding tables
  • Configure state tax codes in payroll software for each affected employee.
  • Add state withholding allowances or voluntary withholding elections where state forms differ from federal W-4.
  1. Withhold and remit correctly
  • Withhold according to the taxing state’s rules. If a state requires withholding even when the employee resides elsewhere, follow the employer‑location state.
  • Remit taxes and file returns on that state’s schedule. Keep a calendar of due dates across states.
  1. Maintain documentation for telework days
  • Track telework and in‑office days to support apportionment rules and nonresident filing positions.
  • Many states accept contemporaneous logs or timekeeping reports; keep them for at least three years.
  1. Communicate with employees
  • Send clear instructions on state tax forms, how withholding changes will look on paystubs, and when they should file nonresident returns.
  • Advise employees to update their state and local tax withholding forms promptly when they move.
  1. Reconcile and correct
  • Run quarterly reconciliations comparing payroll withholding to payroll register and employee addresses.
  • If underwithholding occurred, adjust withholding, consider voluntary withholding agreements, or notify employees about estimated tax payments to prevent year‑end surprises.
  1. Use professional help when needed
  • For multi‑state exposures (10+ employees across states), use a payroll service, PEO, or a tax advisor familiar with multistate withholding rules.

Operational procedures and timelines

  • At hiring: collect completed federal W‑4 and applicable state withholding forms; record the employee’s primary work state.
  • Within 30 days of a change in employee location: review withholding obligations and update payroll codes. Some states require faster action—confirm state deadlines.
  • Quarterly: reconcile state withholding and file state returns (frequency varies by state).
  • Year-end: issue accurate W‑2s showing state wages and withheld amounts per state.

Common scenarios and how to handle them (real-world examples)

  • Employee moves from a high‑tax state to a no‑income‑tax state but continues working remotely for the original employer: If the employer’s state still taxes the income (or the employee earns income sourced there), withholding may still be required. Document the move, consult the source state’s rules (some apply a convenience‑of‑employer test), and adjust withholding only after confirming state guidance.

  • Employee works from several states during the year (frequent travel): Track days worked in each state. Many states use day counts to allocate income. If days exceed the threshold for taxability, the employee may need to file nonresident returns and the employer could have withholding obligations.

  • Small employer with occasional remote workers in another state: Even a single remote employee can create withholding and filing obligations. Register and set up withholding promptly.

Common mistakes and how to avoid them

  • Assuming a no‑income‑tax residence equals no withholding: Incorrect — sourcing rules or the employer’s state may still require withholding.
  • Failing to register timely: Late registration causes tax liabilities, penalties, and interest for the employer.
  • Not tracking telework days: Without records, employers lose defenses in audits and nonresident disputes.
  • Over‑reliance on federal W‑4: Many states use separate state forms or require additional declarations.

Practical tips I use with clients

  • Build a short relocation/update workflow that triggers payroll review whenever an employee updates their address.
  • Automate geocoding of employee work addresses in payroll to flag out‑of‑state placements.
  • Keep a master state calendar of withholding registration and filing due dates.
  • Use voluntary withholding agreements when correcting underwithholding to limit employee tax surprises.

In my practice, clients who implemented automated tracking and a written telework policy reduced state withholding exceptions by 80% within the first year.

Audit readiness and recordkeeping

  • Keep address change forms, signed telework agreements, time logs, payroll registers, and state withholding registration confirmations for at least three to four years.
  • If audited, provide contemporaneous proof of work location and employer action to register and withhold.

Resources and authoritative references

For state specifics, consult the state department of revenue website where the employee performs work. State rules vary—always confirm current statutes and administrative guidance.

Professional disclaimer

This article is educational and does not constitute tax or legal advice. Rules vary by state and facts matter. Consult a licensed tax advisor, employment attorney, or your payroll provider to apply this checklist to your circumstances.

If you need a tailored walkthrough for your payroll setup or a checklist adapted to your company size and employee locations, consider contacting a payroll specialist or tax advisor who handles multistate withholding regularly.