How to Not Owe State Taxes When Living or Working Remotely

Working remotely can create unexpected state tax obligations, especially if you live in one state and work for a company based in another. Many remote workers assume they only owe taxes where they reside, but state laws often complicate this assumption. Without proper planning, you might end up owing taxes to multiple states or facing penalties for filing incorrectly.

Residency Rules

States determine tax residency based on domicile, your permanent home. If you intend to return to a state after temporary absences, that state typically considers you a resident for tax purposes. Even if you spend most of the year elsewhere, maintaining a driver’s license, voter registration, or property in a state can establish residency.

Some states, such as California and New York, apply stricter residency tests beyond domicile. They use a statutory residency rule, considering you a resident if you spend more than 183 days there, regardless of where your permanent home is. This means exceeding this threshold could subject you to full state income tax even if you primarily live elsewhere.

States like Texas, Florida, and Nevada do not impose a state income tax, making them attractive for remote workers seeking to reduce tax liability. However, simply moving to a no-tax state isn’t enough. If you maintain significant ties to your previous state, such as property ownership or business interests, you may still be considered a resident. Some states aggressively audit residency claims, requiring proof of relocation, such as utility bills, lease agreements, and travel records.

Nexus with Out-of-State Activities

State tax laws factor in not just where you live but where you earn income. Nexus is the legal connection between a taxpayer and a state that determines whether the state can impose taxes. For remote workers, this can mean owing taxes in a state even if they never set foot there.

Many states apply an “economic nexus” standard, meaning if you earn income from a company operating in their jurisdiction, they may claim the right to tax you. Some states, including New York, Pennsylvania, Delaware, Nebraska, and Connecticut, enforce a “convenience of the employer” rule, requiring remote workers to pay taxes where their employer is based unless their work is performed in another state out of necessity. This can lead to double taxation if the worker’s home state also taxes the income.

Even without a convenience rule, a state may assert nexus based on payroll location or where an employer withholds taxes. If your employer maintains an office in a state, that state may consider you to have a tax obligation there, even if you work remotely elsewhere. California, for example, requires nonresident workers to file returns if they perform any work for a California-based company.

Credits for Taxes Paid Elsewhere

When multiple states claim the same income, tax credits help prevent double taxation. Most states offer a credit for taxes paid to another state, allowing residents to offset their home state tax liability.

Each state has its own rules for applying these credits. Some, like Arizona and Missouri, offer generous credits that often eliminate any additional tax burden. Others, such as California, may limit the credit to income sourced from states with reciprocal tax agreements. If a state does not recognize a credit for taxes paid elsewhere, the taxpayer could end up paying full income tax to both states.

The credit is typically the lesser of the tax paid to the other state or the tax that would have been owed had the income been earned in the resident state. For example, if a remote worker in Illinois earns $50,000 from a job based in Iowa and pays $2,500 in Iowa state tax, Illinois will grant a credit up to the amount of tax it would assess on that income. If Illinois’ tax liability on the same $50,000 is only $2,200, the worker can reduce their Illinois tax bill to zero but cannot claim the full $2,500 paid to Iowa.

Some states require taxpayers to submit copies of the nonresident tax return, proof of payment, or additional documentation verifying income sourcing. Failure to properly claim the credit can result in overpayment, and in some cases, states may deny refunds if the credit is not claimed within a specific timeframe.

The Significance of Non-Resident Filings

Many states require nonresidents to file a tax return if they earn income sourced within their borders, even if they never physically enter the state. This applies to wages, independent contractor payments, rental income, or business earnings. Failing to file can result in penalties, interest, and potential audit risks, even if no additional tax is ultimately owed.

Some states have specific thresholds for nonresident filings. Georgia requires a return if a nonresident earns more than $5,000 or 5% of their total income from the state. Other states, such as New York, have no minimum threshold and require a return for any income earned within state lines. Noncompliance can lead to automatic assessments, and states like California issue notices if they detect unreported income through employer filings or IRS data-sharing agreements.

Tax treaties or reciprocal agreements between states can simplify compliance. For example, Illinois and Iowa allow residents of one state to be exempt from filing a nonresident return in the other if their only income source is wages. However, these agreements rarely apply to independent contractors, business owners, or those with investment income, requiring careful planning to avoid unnecessary filings.

Tax Treatments for Remote Work

Remote work arrangements create tax complexities that differ from traditional in-office employment. States vary in how they classify remote work for tax purposes, affecting both employees and employers.

Some states determine taxability based on where work is physically performed, meaning remote employees owe taxes only to their state of residence. Others use employer-based sourcing rules, which can require withholding in the state where the company is located. Massachusetts, for example, temporarily applied a sourcing rule during the pandemic that taxed remote workers as if they were still commuting to in-state offices. While this rule has expired, similar policies exist in states like New York, where remote employees may still owe taxes if their work is considered a convenience rather than a necessity.

Employers also face compliance challenges when managing remote workers across multiple states. Many states require businesses to register for payroll tax withholding if they have employees working within their borders, even if the company has no physical presence there. This can create nexus for corporate income tax or sales tax purposes, leading to additional filing requirements. Some companies address this by setting up formal remote work policies that dictate where employees can work to minimize multi-state tax exposure. Employees should verify whether their employer is withholding correctly and, if necessary, make estimated tax payments to avoid underpayment penalties.