Do You Pay More Taxes If You Work Out of State?

Earning income in a different state than where you live can complicate tax season. Depending on the states involved, you may owe taxes to both your home state and the one where you work. However, rules such as credits for taxes paid and reciprocal agreements help prevent double taxation.

State Residency Criteria

States determine tax residency using different factors, with the most common being the “domicile” test. This considers where you maintain your permanent home and intend to return after temporary absences. Strong ties—such as a home, voter registration, or a driver’s license—can establish residency, even if you spend time elsewhere.

Some states apply a “183-day rule,” meaning if you spend more than half the year there, you may be classified as a resident. States like New York and California strictly enforce this rule, conducting residency audits that examine factors such as mail receipt, vehicle registration, and financial accounts.

States without income taxes, such as Texas and Florida, attract individuals seeking lower tax burdens. However, moving to a no-tax state while maintaining strong ties to a previous state can lead to scrutiny. California aggressively enforces residency rules and may continue taxing individuals it believes have not sufficiently severed connections.

Working Across Borders

Most states tax income where it is earned, meaning if you work in another state, that state has the right to tax your wages. This applies even if you work there part-time or travel occasionally.

Some states, including New York, enforce a “convenience of the employer” rule, which complicates remote work taxation. If an employee works remotely by choice rather than employer requirement, New York still considers the income taxable by the state—even if the employee never physically works there. Arkansas, Delaware, Nebraska, and Pennsylvania have similar rules.

Independent contractors are generally taxed based on where they perform services, though some states impose additional obligations, such as local income taxes. Ohio and Pennsylvania, for example, require separate filings for certain cities.

Some states also have temporary work presence thresholds, meaning nonresidents must file a return after working there for a certain number of days. Georgia, for instance, requires a tax return if a nonresident works in the state for more than 23 days in a year.

Withholding Rules

Employers must withhold state income taxes based on where work is performed, which can lead to automatic deductions for a state where the employee does not live. Payroll systems are designed to comply with these regulations, but errors occur if an employer is unaware that an employee works in multiple states or remotely.

Some states, such as New York and Pennsylvania, aggressively enforce withholding rules, penalizing employers who fail to withhold correctly. Employees working in multiple states may need to adjust their Form W-4 or state equivalent to ensure proper withholding.

Reciprocal agreements allow employees to allocate withholding to their home state. For example, an Illinois resident working in Missouri can submit Form MO W-4C to claim exemption from Missouri withholding under the Illinois-Missouri reciprocity agreement. Without proper adjustments, individuals may owe additional taxes at year-end or wait for refunds due to over-withholding.

Certain states impose payroll taxes beyond income tax withholding. California requires employers to withhold for the State Disability Insurance (SDI) program, even if the employee does not live in the state. New Jersey mandates contributions to its Temporary Disability Insurance (TDI) and Family Leave Insurance (FLI) programs, leading to deductions for benefits employees may never use.

Nonresident Filing

Nonresidents must report only income earned within a state, but filing requirements vary. Most states require a “Nonresident Individual Income Tax Return,” such as California’s Form 540NR or New York’s IT-203. These forms typically require taxpayers to calculate total income and apportion the taxable portion based on earnings sourced within the state. Some states use percentage-based apportionment, while others require direct reporting of wages earned within state borders.

Failing to file a required nonresident return can result in penalties, even if no additional tax is owed. Many states impose late filing penalties ranging from 5% to 25% of unpaid tax, with interest accruing daily. Some jurisdictions, including Massachusetts and New Jersey, use automated systems to flag individuals who receive W-2s or 1099s with state-reported income but fail to submit a return, leading to audits or collection actions years later.

Credit for Taxes Paid

To prevent double taxation, most states allow residents to claim a credit for taxes paid to another state. This credit offsets the amount owed to the home state, ensuring the same income is not taxed twice.

The credit is usually limited to the lesser of the tax paid to the nonresident state or the tax that would have been owed on the same income in the home state. For example, if a North Carolina resident earns income in South Carolina and pays $2,000 in taxes there, but North Carolina would have taxed the same income at $1,800, the credit is capped at $1,800.

Some states require additional forms to claim the credit. California, for instance, requires Schedule S to determine the allowable credit. Others, such as Arizona, impose restrictions on credits for taxes paid to states with significantly different tax structures, meaning not all taxes paid may be eligible for a full offset.

States without income taxes, such as Texas and Florida, do not offer credits for taxes paid elsewhere. Additionally, some states, including New York, do not allow credits for taxes paid to local jurisdictions in other states. This means a New York resident working in Philadelphia, which has a local income tax, may still owe additional taxes despite receiving a state-level credit.

Reciprocal Agreements

Some states simplify tax obligations for cross-border workers through reciprocal agreements, allowing residents to pay income tax only in their home state, regardless of where they work. These agreements, typically between neighboring states, reduce administrative burdens for both taxpayers and employers. Instead of filing a nonresident return, individuals covered by reciprocity can submit an exemption form to their employer, ensuring only their home state’s taxes are withheld.

One of the most well-known reciprocity agreements exists between Illinois, Indiana, Kentucky, Michigan, Ohio, and Wisconsin. A resident of Illinois working in Indiana does not need to file an Indiana tax return for wages earned there, as long as they provide their employer with Form WH-47 to claim exemption from Indiana withholding. Similarly, Pennsylvania has agreements with New Jersey, Maryland, and Virginia, allowing residents to avoid filing multiple state tax returns.

Not all states participate in these agreements. High-tax states like California and New York do not offer reciprocity, meaning individuals working in these states must file nonresident returns and pay taxes there, even if they live elsewhere. Additionally, reciprocity agreements generally apply only to wages and salaries, meaning independent contractors, business owners, and those with investment income may still face multi-state tax obligations.