Tax considerations for remote work and multi-state employment
So, you’ve untethered yourself from the office. Your new corner office has a view of your backyard, and your commute is a stroll from the coffee maker to the laptop. It’s liberating. But then tax season rolls around, and suddenly, that geographical freedom feels… complicated. You’re dealing with a whole new world of tax considerations for remote work.
Honestly, it’s a maze. A maze where the rules change depending on which state you’re in, which state your employer is in, and how much time you spend where. Let’s untangle this together.
The core concept: state tax residency and nexus
Before we dive into the nitty-gritty, you need to understand two key players in this game: state tax residency and nexus.
Your state tax residency is your official “tax home.” It’s typically the state where you live, vote, and have your most permanent connections. You are generally required to file a resident tax return there, reporting your worldwide income.
Now, nexus is a bit more slippery. It’s a legal term for a “sufficient physical presence.” When you, as an employee, work from a state, you can create nexus for your employer there. This triggers a tax obligation for them. For you, it means you might owe income tax to that state, even if you’re just visiting for a few weeks.
Where do you owe taxes? The three main scenarios
1. Living and working in one state
This is the simple scenario. You live in State A, your company is based in State A, and you work from your home in State A. You file one state tax return. Easy. Let’s move on, because, well, it gets more interesting from here.
2. The remote worker in a different state
Here’s where it gets real for most remote workers. You live in State B, but your employer’s office is in State A. In this case, you are considered working in State B. So, you will likely:
- File a resident tax return in State B, reporting all your income.
- File a non-resident tax return in State A if that state has an income tax. Why? Because you are earning income from a source within that state—your employer.
Now, here’s a crucial bit. To avoid being double-taxed on the same income, most states offer a tax credit for taxes paid to another state. You pay the higher of the two state rates, essentially. It’s a relief valve, but it doesn’t make the paperwork any simpler.
3. The digital nomad and multi-state employee
This is the ultimate test. You live in State B, your employer is in State A, but you decide to spend two months working from a beach house in State C. Congratulations, you may now have a tax filing obligation in three states.
States have different rules for what’s called a “convenience of the employer” rule. New York, Nebraska, and a handful of others are notorious for this. If your employer is based in one of these states, but you choose to work remotely from another state for your own convenience, that state can still tax 100% of your income. It’s a big deal. A very big deal.
Key pain points you can’t afford to ignore
Beyond the basic rules, there are specific hurdles that trip people up all the time.
Withholding is a mess
Your employer’s payroll system might not be set up to withhold taxes for multiple states. They might only withhold for their home state. This means you could end up with a surprisingly large tax bill come April because little to no state tax was withheld for the state you actually live and work in. It’s a common shock.
The 183-day rule (and its quirks)
You’ll often hear that you become a resident if you spend more than 183 days in a state. That’s a good guideline, but it’s not the whole story. Some states have a “first day” rule—earning income there on your very first day creates a filing requirement. Others count any part of a day as a full day. Keeping a detailed calendar of your whereabouts isn’t just a good idea; it’s a tax necessity.
Local taxes? Oh yes.
Just when you thought you had states figured out, cities get involved. If you live or work in a city with a local income tax (like New York City, Philadelphia, or Denver), you may have to file and pay there, too. It’s a layered cake of potential obligations.
Proactive steps to tame the tax beast
Feeling overwhelmed? Don’t. You can get ahead of this. Here’s a practical game plan.
1. Have “the talk” with your employer
Communication is everything. Be upfront about where you plan to work. Ask them:
- Can you withhold taxes for my state of residence?
- What is your policy on multi-state work?
- Will my compensation be adjusted if I move to a different location?
2. Meticulously track your location
Use a digital calendar or an app to log every day you work in a state other than your primary residence. Note the dates, the location, and the number of hours worked. This diary is your first line of defense in an audit.
3. Understand your state’s agreements
Some states have reciprocal agreements. For instance, if you live in New Jersey but work in Pennsylvania, you might only have to file in your home state. These agreements are golden—find out if any apply to your situation.
4. Consider making estimated tax payments
If you know your employer isn’t withholding enough for a particular state, you may need to make quarterly estimated tax payments directly to that state’s revenue department. It’s a hassle, but it beats a penalty.
The future is… complicated
The pandemic-fueled shift to remote work happened faster than tax laws could keep up. States are scrambling to claim their piece of the pie, and the rules are in flux. There’s a push for federal legislation to simplify things, but for now, we’re navigating a patchwork of conflicting state laws.
Your geographical freedom is a powerful thing. It’s a new form of wealth. But like any asset, it requires management and a clear understanding of the rules of the road—or in this case, the rules of the router. The key isn’t to be paralyzed by the complexity, but to be prepared for it. To look at that map of the United States not as a minefield, but as a landscape of opportunity, one you can navigate wisely with a bit of foresight.
