Quick overview

Working from a different state than your employer can trigger state income tax, withholding, and filing requirements in both your resident state and the state where work is sourced. States differ on how they determine residency and source income. This guide explains the core rules, practical steps to reduce audit risk, and planning actions I use with clients.

Background: why this matters now

Remote work increased sharply after 2020. Research from the National Bureau of Economic Research shows a large, persistent shift of employees working away from employer headquarters (NBER, 2021). States have responded in varied ways: some rely on traditional sourcing rules (tax where work is performed), others apply employer-centric or convenience-of-the-employer tests, and a few changed withholding guidance temporarily during pandemic-era remote work.

Why it matters to you: state rules determine whether you must file a nonresident return, pay tax where your employer is located, or claim a credit on your resident return. Failure to file or withhold correctly can lead to unexpected tax bills, penalties, and interest.

How state taxation usually works

  • Resident state taxation: Most states tax residents on all income, wherever earned. Residency is a legal concept (domicile vs. statutory residency) decided by each state’s rules.
  • Nonresident taxation: States generally tax nonresidents only on income sourced to that state — often wages for services performed physically in the state.
  • Credits and relief: To avoid double taxation, most states give residents a credit for income taxes paid to another state on the same income (check your state for the exact credit formula).

Source authority: See state tax guides and general overviews at the IRS and tax policy organizations (IRS; Tax Foundation). For state-specific rules, consult the state’s department of revenue website.

Common state rules and special tests

  • Domicile vs. statutory residency: Domicile is your permanent home. Statutory residency rules count days present and can make you a resident for tax purposes even if you claim domicile elsewhere.
  • Day-count rules: Several states use a 183-day test or similar to classify part-year or full-year residents. Keep accurate logs of where you actually worked each day.
  • Convenience-of-the-employer / employer-location rules: Some states — notably New York — have rules that may treat wages as sourced to the employer’s state if remote work is done for the employee’s convenience rather than the employer’s necessity. These rules are complex and contested; treat them carefully and consult tax counsel for high-income situations.
  • Reciprocity agreements: A few states have reciprocity arrangements that allow residents to avoid withholding in another state if they live and work across border lines (often between neighboring states). Check whether your states have such agreements.

Authoritative context: State rules change; always check your state’s revenue department guidance (state DOR) and consider Tax Foundation summaries for comparative views.

Practical examples (real-world context)

  • Example 1: Live in Florida (no state income tax) and work remotely for a California employer. Florida won’t tax wages, but California may assert a claim on wages tied to services performed in California. If you never work physically in California, California generally should not tax you — but if employer has payroll or convenience rules, you may need to file. I’ve seen clients surprised by withholding when employers used headquarters’ payroll default settings.

  • Example 2: Live in New Jersey and commute to an employer in New York pre-remote. If you switch to working remotely full-time from New Jersey, New York’s sourcing and convenience rules may still apply for a period depending on facts. In my practice, we documented the employer’s written remote-work policy and the employee’s physical work location each day to support the New Jersey resident’s non-New York sourcing claim.

Who this affects

  • Full-time remote employees whose employer is headquartered in another state.
  • Hybrid workers who split physical presence across states during the tax year.
  • Independent contractors and freelancers who provide services to clients in multiple states.
  • Individuals who move mid-year or maintain multiple residences.

If you’re in any of these categories, expect to review residency tests, withholding, and potential credits.

Step-by-step checks and documentation I recommend

  1. Track your work location daily. Keep a contemporaneous log (date, hours worked, city/state, reason for remote work). This is the single most useful piece of evidence for audits.
  2. Confirm your state residency status. Review domicile indicators: home ownership/rental, voter registration, driver’s license, where family lives, mailing address, and time spent in each state.
  3. Review employer withholding settings. Ask payroll whether they withhold state tax for your state of residence and for the employer’s state; request corrections if wrong.
  4. Determine whether a nonresident return is required. If you performed work in the other state or the state has an employer-focused sourcing rule, you may need to file.
  5. Claim credits where allowed. Most states credit residents for taxes paid to another state on the same income; you’ll need the nonresident return and supporting docs.
  6. Consider estimated tax payments. If withholding is insufficient, make quarterly estimated payments to avoid penalties.
  7. Keep supporting records: travel logs, employer remote-work policy, written assignments, and proof of home and community ties.

Withholding, employer obligations, and nexus

Employers may need to withhold and remit state income tax based on employee location or where wages are sourced. Some employers decide to withhold based on headquarters location unless the employee provides proof of residency elsewhere — that can create withholding mismatches. Employers also face state payroll registration requirements when they have employees working in additional states (state nexus). For employer-side details see our guide on State Taxation of Remote Workers: Employer Registration Steps.

Common mistakes and how to avoid them

  • Not tracking days or mixing up residence and domicile. Fix: use a time-stamped log and document domicile indicators.
  • Assuming no tax because your home state has no income tax. Fix: verify whether the employer’s state has sourcing or convenience rules that could apply.
  • Waiting until tax filing season to correct withholding. Fix: review payroll withholding proactively when you change work location.

Planning strategies (what I do with clients)

  • For high-income taxpayers, evaluate the convenience-of-the-employer risk before moving or accepting a remote job. If a state has aggressive sourcing rules, a written employer policy clarifying the employer’s business reasons for remote work can help.
  • For frequent travelers or digital nomads, establish a clear domicile and maintain consistent documentation (voter registration, license, professional ties).
  • Consider tax-equalization conversations with employers for cross-state assignments, which can shift withholding or provide gross-up arrangements for unexpected liability.

Audit risk and evidence states look for

States will look for: day counts, employer payroll records, home location evidence (lease or deed), utility bills, vehicle registration, voter registration, and statements of intent (e.g., employment offer letters). Maintain at least a year of contemporaneous records; many auditors expect more for multi-state issues.

Frequently asked questions

  • Do I have to file in both states? Possibly. You may file a nonresident return in the work state and a resident return in your home state. Most residents claim a credit for taxes paid to another state to avoid double taxation.
  • What is the convenience-of-the-employer rule? A sourcing rule used by some states that can tax wages based on the employer’s location if the employee’s remote work is for personal convenience rather than employer necessity. New York has historically applied this rule; rules and litigation have evolved—seek professional review for exposure.
  • If my employer withholds the wrong state tax, who pays the penalty? Ultimately the taxpayer is responsible for correct tax payments. If withholding is wrong, you may need to file amended returns and pay estimates. Ask payroll to correct future withholding and provide corrected W-2 when possible.

For additional guidance on residency tests and when to file nonresident returns, see our article: Filing State Taxes for Remote Workers: Residency Rules.

Resources and authoritative sources

Professional disclaimer

This article is educational and reflects common practices and my experience advising clients. It is not individualized tax advice. State tax rules change and fact patterns matter — consult a CPA or tax attorney for personalized advice.

Key takeaways

  • Your resident state usually taxes all income; nonresident states may tax income sourced to them.
  • Track where you work, confirm payroll withholding, and understand credit mechanics to avoid double taxation.
  • For complex situations (high income, frequent travel, or states with convenience-of-the-employer rules), get professional advice early to manage withholding, filings, and audit risk.

If you want, I can help draft a one-page work-location log template and a short checklist to give your employer for payroll corrections.