Quick overview

State withholding responsibilities depend on which state(s) the employee performs work in and where they’re a resident. Some states tax based on residency, some on source of income (where the work is performed), and a few have reciprocity or day-count exceptions. Employers that get withholding wrong can face payroll penalties; employees may have to file multiple state returns to claim credits or refunds.

How withholding is typically determined

  • Residency: If an employee lives in State A and performs all work there, many states expect the employer to withhold for State A (check state law).
  • Work location (sourcing): If an employee performs services in State B, State B may require withholding on wages earned there even if the employer is in State C.
  • Days thresholds and special rules: Several states use day-count tests or have temporary nonresident exemptions for short stays.
  • Reciprocal agreements: Neighboring states sometimes agree that only the resident state taxes wages (common around DC/MD/VA, PA/NJ, etc.).

Authoritative resources: see IRS state links for contact and filing rules (IRS.gov), and the Multistate Tax Commission for multistate guidance (mtc.gov).

Employer checklist (practical steps)

  1. Confirm the employee’s work location(s) and home state each payroll period.
  2. Review the employee’s completed state W-4 or equivalent — many states have their own withholding forms.
  3. Check for reciprocity or short‑term exemptions in the work state’s tax guidance.
  4. Register for withholding in any state where you’re required to collect tax and remit on schedule.
  5. Keep detailed time/location records for multistate employees — these support sourcing and defenses in audits.
  6. Consider a payroll provider with multistate expertise or consult a multistate payroll CPA.

In my practice I’ve seen employers avoid months of audit work by maintaining simple daily location logs and asking remote hires to confirm residency and primary work state in writing.

Employee checklist (what to watch for)

  • Tell payroll where you actually perform work and update your state withholding form after moving or when travel patterns change.
  • If you get tax withheld in a nonresident state, plan to file that state’s nonresident return and claim a credit on your resident return if applicable.
  • Track days worked in each state; many states require allocation based on days or hours.

Common scenarios and examples

  • Remote employee lives in California but is employed by a Texas company: California generally expects withholding on wages for California residents (see CA Franchise Tax Board guidance).
  • Employee lives in Florida (no state income tax) but employer in Massachusetts withholds MA tax in error: the employee would usually file a refund claim with Massachusetts and show Florida residency on the return.

For more on residency rules and how they affect withholding, see our explainer on how state residency is determined for part‑year and remote workers: How State Residency Is Determined for Part‑Year and Remote Workers. If you need actionable steps for employers, our multistate withholding checklist is a practical guide: Multistate Withholding for Remote Workers: Employer and Employee Checklists.

Common mistakes to avoid

  • Assuming payroll software automatically handles every multistate withholding rule.
  • Failing to register for withholding in a state where remote employees perform work.
  • Not collecting state‑specific withholding forms from remote hires.

Next steps and resources

  • Start by checking the employee’s resident and work‑state withholding rules on the state department of revenue websites and the IRS state links page (IRS.gov/state-links).
  • For proposed federal solutions and ongoing policy discussion, search the Mobile Workforce State Income Tax Simplification Act and Multistate Tax Commission materials (mtc.gov).

Professional disclaimer

This article is educational and does not replace personalized tax or legal advice. State rules change and can be complex — consult a licensed CPA or payroll attorney for decisions that affect withholding registration, payroll setup, or multistate filings.

Selected further reading (FinHelp)

(Author: FinHelp editorial — content updated 2025. Sources: IRS, Multistate Tax Commission, state DORs.)