State tax withholdings for remote employees are similar to withholdings for in-state employees. These come in the form of income taxes and State Unemployment Tax Assessment (SUTA) taxes. However, state taxes for remote workers can differ based on where the employee works and lives.

Even before the COVID-19 pandemic we worked with thousands of out-of-state remote workers, helping them minimize their tax liability and avoid trouble with either state governments or the IRS. When a person lives in one state but works in another, they may have tax liability in both states, but typically receive a tax credit to eliminate double taxation of that income. To avoid double taxation, most states offer a credit for taxes paid to other states on earned income.

Employee Challenge

They receive tax forms and benefits related to the country’s local benefits requirements. For example, standard employees in the U.S. receive a W-2, indicating their tax status. The W-2 determines the state tax withholding for remote employees (and everyone else). In June 2020, to escape the city and take advantage of a backyard, she decided to visit her parents in Arizona for an extended stay. Lydia should file state income tax returns in both Illinois and Arizona because, while her permanent worksite and place of residence are in Chicago, she worked from Arizona for long enough to trigger its income tax rules (more than 60 days).

Under these conditions, you would not need to file non-resident state tax returns, meaning you only need to pay in one state. This rule indicates that you might not have to pay twice as long as your employer requests you to work in this remote location for the company’s convenience. Suppose you become liable for collecting and remitting sales tax for states due to remote work.

There Are Tax Deductions Unique to Remote Workers

Since the employee has worked entirely in Louisiana, this is the state where the employee’s work is localized, even if the employer’s corporate office is in Arkansas. A temporary remote worker is an employee who typically works in one state but who currently works elsewhere. Your employee might need to work in another state temporarily while they finish up selling their home. An administrative decision that likely escaped the notice of most lawmakers has quietly transformed Alabama’s taxation of nonresidents, raising constitutional questions and putting Alabama employers at a distinct disadvantage. If you started working remotely in a different state than the office location, you may be on the hook for filing a tax return in multiple states. If you spend a significant time working in a different state, we recommend you check in with your CPA to determine your obligation.

• At the federal level, employers must withhold federal income tax, Social Security taxes, Federal Unemployment Tax (FUTA), and Medicare taxes for all W-2 employees, including remote workers.
• Reciprocal agreements are common between states with a large commuter population, such as the DC and Chicagoland areas.
• Pennsylvania has reciprocal tax agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia.

When you live in one state but work in another, the resident state typically provides you with a tax credit for the taxes paid to the non-resident state in order to avoid double taxation. Whether or not you pay more taxes when working from home depends on various factors, how do taxes work for remote jobs such as your location, employer’s location, and the specific tax laws of the states involved. While some states have implemented a work-from-home tax to make up for lost revenue due to remote work, others have passed laws to prevent double taxation of remote workers.

When Working Remotely Triggers State Income Tax Requirements

Workers in New Hampshire and Tennessee may be subject to state taxes on investments and other income, but these states do not charge state taxes on wages. Unlike full- and part-time employees, self-employed and contract workers in New Hampshire may be subject to state taxes on their income in certain situations. If your employee works in a different state than where your company is registered, that’s where things get more complicated. Your organization will need to register with local and state tax agencies for each state where you have employees. Your payroll and HR managers will also need to speak with that state’s labor and unemployment agencies to make sure they are following proper protocols and procedures.

Another group that should pay attention during tax season are those who moved from states with high-income taxes to those with low or zero-income taxes—and are trying to avoid paying state income tax. “If you want to move there for a couple of months just to lower your taxes, that’s probably not going to happen,” Taylor says. Their taxes will be much higher than in the past, particularly if they did not adjust their withholdings accordingly. As the hybrid workplace has become the norm, both employees and employers must be aware of how working remotely affects taxes. No matter your unique situation, common factors, such as tax residency, reciprocal tax agreements, and the convenience of the employer, will affect how you file your state returns.

Each State Makes Its Own Tax Rules

Further, the Commerce Clause prohibits state regulations from discriminating or imposing undue burdens on interstate commerce.[13] This Comment argues that these state taxes do discriminate and impose an undue burden on interstate commerce. Supreme Court or federal lawmakers should address this issue to ensure the constitutional apportionment of state income taxes. Some states follow the “convenience of the employer” rule, which requires a worker to pay income taxes where their employer’s office is located because the employee works remotely for convenience’s sake rather than necessity. These states are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania. This means that under certain circumstances, a person might be taxed both where they work and where their employer’s office is located, resulting in double taxation without any tax credit. If you have out-of-state remote workers on your payroll, it’s essential to understand how payroll taxes for out-of-state remote employees work.

For now, let’s stick to tax liabilities for remote workers who live outside the United States but work for companies based in the U.S. Remote workers have become a staple of the workplace, but hiring out-of-state employees can lead to payroll tax complications. Multi-state payroll tax withholding done incorrectly can lead to penalties and interest for employers and create tax headaches for employees. Payroll remediation by experienced state and local tax advisors can alleviate these difficulties by working with the appropriate state and tax authorities to rectify past mistakes and ensure future compliance. While these nine states are all income tax-free, most states do require residents to file a tax return. And keep in mind that even if you live in one of the above states, you’ll have to file a non-resident tax return if a state that does charge an income tax appears on your W-2 form.

But, equipped with a team that they trust, many employers are finding the growing trend towards remote roles to be working in their favor. Thankfully, in most instances, just because you have to file taxes in two different states doesn’t mean that you have to pay twice as much. Usually, a remote out-of-state worker can receive a tax credit from their home state to avoid being double taxed. However, that tax credit is usually limited to the relevant state’s income tax rate.