Quick answer

Most states require withholding when a nonresident performs taxable work inside the state or when state law treats the payer as a withholding agent for payments to nonresidents. Rules differ: some states focus on employee wages, others extend withholding to independent contractors or businesses that earn income sourced to the state.

Why this matters

Failure to withhold when required can create three problems: the payer may be held liable for unpaid tax plus interest and penalties; the contractor can face unexpected tax bills and withholding credits issues; and both parties can incur administrative burdens to correct filings. (See IRS Publication 15 for federal employer guidance and your state revenue website for state rules.)

Common triggers that create a withholding obligation

  • Location of services: Income sourced to the state when services are performed there (in-person or, in some states, telework tied to a client site).
  • Employee status: Withholding rules for employees are nearly universal; reclassification of a contractor as an employee can trigger back withholding.
  • State-specific nonresident rules: Several states require withholding on payments to nonresident independent contractors or businesses when the work creates taxable presence (nexus).
  • Industry exceptions: Entertainment, construction, and communications often have specific withholding and reporting rules.

Note: Thresholds, exemptions, and form names vary by state. Always confirm the current rule with the state revenue department before making decisions.

Practical step-by-step compliance checklist

  1. Identify where the services are performed. Document dates and locations for each engagement.
  2. Classify the worker correctly (employee vs independent contractor). Use federal/state guidance—misclassification is a common audit trigger.
  3. Check the state’s withholding rules and thresholds. Search the state department of revenue website for “nonresident withholding” or “withholding on payments to nonresidents.”
  4. Request required paperwork from the contractor (e.g., Form W-9 for U.S. payees, state exemption certificates or nonresident tax forms).
  5. If required, register as a withholding agent with the state, set up withholding payroll processes, and withhold at the state rate or specified withholding rate.
  6. File periodic withholding returns and annual reconciliations. Issue required year‑end statements (state and federal forms such as 1099 if applicable).

Documentation and common forms

  • Federal: Form W-9 (request for taxpayer identification); 1099-NEC for reportable nonemployee compensation; IRS Publication 15 for employer withholding basics.
  • State: Names vary—look for forms titled “nonresident withholding certificate,” “withholding registration,” or similar on the state revenue site.

Penalties and enforcement

States can assess the unpaid tax, interest, and penalties against the payor (withholding agent) or the payee. Some states also impose return‑filing penalties. If you think you were incorrectly assessed, many states provide administrative appeal steps—follow the state’s instructions promptly.

Short real-world example

A small software firm in Ohio hires a freelance designer who performs two weeks of on-site work in California. California may treat the payments as California‑sourced income and require the firm to withhold or to collect a nonresident withholding certificate—so the firm should verify California’s nonresident withholding rules and register if necessary.

Professional tips

  • Treat location records as your strongest defense—keep dated timecards, signed engagement letters, and travel logs.
  • When in doubt, collect a W-9 and any state-specific exemption forms; those forms are often required before you can stop withholding.
  • Budget for withholding: if you are the payer, build withholding into project pricing so cash flow isn’t squeezed.

Where to get authoritative guidance

  • IRS Publication 15, Employer’s Tax Guide (for federal wage withholding) and IRS guidance on backup withholding and 1099 reporting (irs.gov).
  • State department of revenue or taxation websites for current nonresident withholding rules and forms (search “nonresident withholding” + your state).

Further reading on FinHelp: see our guides on State Withholding Rules for Remote Workers: Where to Withhold and Why and State Withholding Requirements for Remote Contractors: Employer Obligations, which walk through remote‑work and contractor scenarios.

Professional disclaimer: This article is educational and not tax advice. For determinations that affect your business or tax situation, consult a qualified tax advisor or the relevant state revenue department.