What If I Work in a Different State Than My Employer?

Remote work has become increasingly common, leading many employees to live in a different state than where their employer is located. This situation raises significant tax implications that both workers and employers must navigate carefully. Understanding these complexities is essential for compliance with various state tax laws.

This article explores key issues involved when working across state lines, including residency determination, payroll withholding, income allocation, and more.

Determining Residency

Residency determination is a critical aspect of state tax compliance for individuals working remotely across state lines. Each state has its own criteria for establishing residency, often involving physical presence, domicile, and intent. For instance, some states consider you a resident if you spend more than 183 days within their borders, while others focus on where you maintain your primary home or intend to return after temporary absences.

Domicile, defined as the place you consider your permanent home, is influenced by factors such as family location, the address on your driver’s license, voter registration, and where you conduct personal and financial activities. Changing your domicile requires clear evidence of intent, such as relocating your family, updating your mailing address, and revising legal documents.

In some cases, individuals may be considered statutory residents in a state where they are not domiciled. This can occur if they maintain a permanent place of abode and spend substantial time in that state. Statutory residency can lead to dual residency situations, requiring individuals to meet complex tax filing obligations and understand state-specific tax laws to avoid double taxation.

Payroll Withholding

Payroll withholding for remote workers involves understanding the tax obligations of both the employer’s state and the employee’s state of residence. Employers are generally required to withhold state income taxes based on where the work is performed. However, remote work complicates this process. Many states mandate withholding based on the employee’s residence, while others require it based on the employer’s location—or both.

For example, states like New York apply a “convenience of the employer” rule, where taxes are withheld based on the employer’s location unless remote work is necessary rather than optional. In contrast, states like California focus on the employee’s physical presence. Payroll software can assist in managing these requirements by automating withholding adjustments based on state laws and employee data.

Reciprocal agreements between states can simplify withholding for employees living in one state and working in another. These agreements allow employees to pay taxes only in their state of residence. However, not all states have such agreements, making it essential for employers to verify and adjust payroll systems accordingly.

Allocating Income Between States

Allocating income between states requires understanding each state’s tax regulations. The challenge lies in determining how much income should be reported to each state, especially when an individual resides in one state but earns income in another. This process involves more than dividing income by days worked in each state; it requires navigating state-specific tax codes and apportionment formulas.

Some states tax income earned within their borders (source-based taxation), while others tax income based on residency. For instance, an employee living in New Jersey but working in Pennsylvania may need to allocate income based on where the work is physically performed. States like Pennsylvania use a daily allocation method, dividing income based on actual workdays in each state.

The rise of remote work has prompted some states to revise income allocation rules. For example, Massachusetts temporarily taxed remote work for Massachusetts-based companies as if it were performed in-state. These shifts require employees and employers to stay informed about evolving regulations to ensure accurate tax reporting.

Tax Credits for Dual Filing

Dual filing arises when individuals must file tax returns in multiple states due to differing tax obligations. Many states offer tax credits to mitigate double taxation, offsetting taxes paid to another state. For example, if you reside in Georgia but earn income in South Carolina, Georgia might provide a credit for taxes paid to South Carolina, reducing your tax liability.

The availability and calculation of these credits vary. Some states offer a straightforward dollar-for-dollar credit, while others impose limits or use specific calculation methods based on income proportions. Understanding these nuances is crucial for accurate tax filing. Reviewing state tax codes and consulting tax professionals experienced in multistate taxation can help maximize available credits.

Employer Nexus Considerations

Employer nexus refers to the connection or presence a business has in a state, which can trigger tax and compliance obligations. Traditionally, nexus was established through physical presence, such as an office or warehouse. However, remote work has expanded this definition, with many states now considering employees working within their borders as sufficient to establish nexus.

For example, if a company based in Illinois has an employee working remotely in Colorado, Colorado may assert that the company has nexus within the state, subjecting it to taxes and compliance requirements. States like New York and California aggressively enforce nexus rules, requiring businesses to register and file taxes even for minimal in-state activity.

To address these challenges, companies are conducting nexus studies to assess exposure in various states. These studies evaluate factors like the number of employees in a state, the nature of their work, and the duration of their presence. Employers may also restructure remote work policies, limiting the states where employees can reside to reduce nexus risks. Voluntary disclosure agreements (VDAs) can provide a pathway for businesses to resolve past nexus issues with reduced penalties.

Unemployment Insurance Coverage

Unemployment insurance (UI) coverage is governed by the state where the employee works. For example, if an employee lives and works remotely in Texas for a company based in Florida, Texas UI laws typically apply.

The U.S. Department of Labor’s “Localization of Work Provisions” outlines four tests to determine the appropriate state for UI coverage: where the work is localized, the employee’s base of operations, where work direction occurs, and the employee’s residence. If an employee splits time between states, the state where the majority of work is performed usually takes precedence.

Employers often use multi-state payroll systems to comply with UI reporting requirements. These systems allocate wages and calculate contributions based on state laws. Employers should also stay updated on state-specific UI tax rates, which can vary significantly. Accurate reporting and timely contributions are essential to avoid penalties and maintain eligibility for tax credits under the Federal Unemployment Tax Act (FUTA).