If you have employees earning income or working in more than one state, there’s a good chance you’ll need to withhold taxes in each of those states.
Yes, even if they’re working from home.
This is important to get right because getting it wrong can lead to tax penalties (and a mess during tax season).
So let's help you get it right!
Let’s say your employee lives in New Jersey, but heads into New York a few times a month. Or maybe they live in Pennsylvania and occasionally work in the office in New York. In both situations, you may be responsible for withholding in more than one state, even if the work is part-time or temporary.
That’s because most states require income tax withholding based on where the work physically happens, not just where the employee lives.
However, some states have what are called reciprocity agreements. These allow employees to pay income tax only to the state where they live, even if they work across state lines - this even counts for remote workers. For example:
But not all neighboring states have these agreements (check out the full list here).
New York does not have reciprocity with any other state. That means if your employee lives in New Jersey, but performs work in New York, you’re expected to withhold for both!
A lot of companies assume that if someone works remotely, you just withhold in the state where they live.
Sometimes that’s correct, but not always.
Some states use something called the “convenience of the employer” rule. That includes New York, Delaware, Nebraska, and Pennsylvania (though Pennsylvania is more flexible).
This means if an employee could be working from your office, but chooses to work remotely for convenience, the employer’s state still gets to tax the income.
So if your company is based in New York and your employee works remotely in Connecticut, New York still wants you to withhold taxes for them. That’s true even if they never set foot in your office!
👉 Here’s the official guidance of New York if you’re interested: TSB-M-06(5)I
Here’s something else to keep in mind… When someone on your team works from another state, it might create what’s known as “nexus.” That means your business now has a presence there for tax purposes.
Nexus can trigger more than just payroll withholding. You might also be responsible for:
Even if you don’t have an office in that state, one remote employee could be enough.
Massachusetts has stated that a remote employee working there can create corporate tax obligations.
If your team is remote or hybrid, or if you’ve recently expanded into new states, make sure you’ve reviewed your nexus exposure thoroughly.
Avalara has a great state-by-state breakdown to help you get a better understanding!
This might sound like a lot, but you don’t need to figure it out alone.
Start by:
With Megapay, you can easily track your employee’s work locations and make sure that you’re withholding based on where your employees are physically working.
Don’t have the bandwidth to double check each employee? We’ve got you covered with our fractional HR services - learn more about that here.
Remote work isn’t temporary. Neither are state tax laws.
If your employees are working, earning, or traveling across state lines, your payroll needs to stay one step ahead. Megapay makes it easy to stay compliant, minimize surprises, and protect your business from penalties.
Need help figuring out where you owe what? It's a good time for us to talk.
We’ll help you get everything set up the right way.