Payroll for Employees Who Work in Another State

My employee works remotely in another state. What should I check first?

Start with where the employee actually works, where they are a tax resident, and when each arrangement began. Then check each payroll obligation under both states' current rules; the company address alone does not settle the answer. New York's withholding rules and California's multistate employment guidance apply different tests to different taxes.

Get the employee's worksite address, home address, dated work schedule, travel days, and any written remote-work arrangement. A home mailing address does not show where every workday occurred. If the employee works in one state and lives in another, check both agencies before running the next payroll. For basic federal and home-state setup, see setting up payroll.

Does the home address or physical work location control withholding?

Neither address controls in every state. Work location often creates source-state withholding, while residence can create a separate withholding duty; an employer's connection to the state also matters. Pennsylvania's rules cover resident employees working inside or outside Pennsylvania and nonresidents working inside it. But an out-of-state employer whose only Pennsylvania connection is a full-time home teleworker is not required to withhold Pennsylvania tax. New York's rules also identify resident and nonresident wages, but say an out-of-state employer with no office, business, incorporation, or license there is not required to withhold merely because an employee resides in New York.

Physical presence is not always the last step. New York generally treats an out-of-state telework day as a New York workday when a nonresident's primary office is in New York, unless the employer established a bona fide office at the telework location. That convenience rule can change the result even though the employee stayed home elsewhere. Check the work and residence states' sourcing, employer-connection, and allocation rules before choosing a withholding state.

For New York nonresident withholding, have the employee certify nonresidence and estimate New York wage allocation on Form IT-2104.1.

New Jersey also applies a reciprocal convenience rule to certain nonresidents assigned to a New Jersey office who work remotely for their own convenience. It does not apply to Pennsylvania residents covered by reciprocity or to an employee who performs no services in New Jersey that year.

When must I register in the second state?

Register when that state's rules make you responsible for withholding, unemployment coverage, or another payroll program, using the account each agency requires. Review coverage before the first affected paycheck. California requires a business employer to register within 15 days if it hires an employee and pays more than $100 in a calendar quarter. Wage reporting and deposits may have separate schedules. Pennsylvania requires an employer withholding account before reporting and paying its withholding, while California issues an employer payroll tax account number for its payroll filings, wage reports, payments, and adjustments.

One state payroll account does not automatically register you with the other state's tax agency or a city. Nor does a payroll account settle whether your company must register to do business there; see registering in another state.

Which state receives unemployment tax if the employee works in more than one?

For a single employee's multistate services, apply the unemployment coverage tests in order to identify the covering state; do not divide the same services between states just because the employee crosses a border. California's multistate guidance describes the common sequence and says the employee must perform some work in California before California can cover all those services under it.

The employer pays its unemployment contribution; New Jersey also requires worker contributions deducted from pay.

California also describes an interstate coverage arrangement for eligible multistate work. If the services are localized, California's election form says the election is unavailable. Otherwise, both the employee and employer sign; California and the state with ordinary jurisdiction must approve it. An approved election can start on the first day of the submission quarter or a later quarter. Confirm coverage with the agencies, especially for permanent work in two states. California uses these tests for disability coverage as well, but other state programs need their own check.

What if the employee lives in one state and regularly works in another?

Income tax withholding can apply in both the work state and the residence state. Check the work state's rule for wages earned there, then whether the residence state also requires withholding on those wages. New Jersey's instructions, for example, require additional resident withholding when the employee works partly outside New Jersey or the other state's withholding is lower. Some states allow a resident credit for tax paid to the work state on the employee's return, but that does not itself tell the employer which withholding account to use. New York explains the resident credit; Pennsylvania's instructions distinguish resident work outside the state from nonresident work partly inside it.

Track workdays by state rather than assigning all wages to the office or home state. Pennsylvania, for example, generally requires withholding on a nonresident's compensation for services performed in Pennsylvania, not compensation for services elsewhere, unless a reciprocal agreement changes that treatment. Its instructions also address withholding for Pennsylvania residents who work wholly or partly outside the state. Regular split schedules need records that support the allocation shown on payroll reports and the employee's wage statement.

Can a reciprocal agreement change the withholding state?

Yes, but only for states and pay covered by the agreement, and the employee may need to provide a certificate. Pennsylvania's employer guidance lists its reciprocal states and says a Pennsylvania employer that stops withholding Pennsylvania tax for a qualifying nonresident must withhold that worker's residence-state tax. For Pennsylvania's REV-419, the employee files the certificate with the employer as soon as eligible; both sign it, and the employer sends a copy to Pennsylvania for a reciprocal-state claim. The employee need not renew it yearly unless residence changes.

In the reverse direction, a Pennsylvania resident working in New Jersey gives the employer Form NJ-165 to stop New Jersey withholding. The employer keeps it rather than sending it to New Jersey. The New Jersey employer must withhold Pennsylvania tax if required to do so; otherwise it may elect to. The employee must report a change from Pennsylvania residence within 10 days.

Check the agreement's exact scope before applying it. Pennsylvania's reciprocal rules concern covered employee compensation; they do not decide unemployment coverage, disability contributions, or every local wage tax. If an employee's residence changes, review the certificate and withholding again.

If the employee expects to owe Pennsylvania income tax and no longer qualifies for REV-419 nonwithholding, the employee must revoke the certificate in writing within 10 days of anticipating that liability.

Do city or county payroll taxes follow the work location?

Sometimes; a local tax may follow residence, work location, or both. Philadelphia's Wage Tax rules cover Philadelphia residents wherever they work and nonresidents who work in the city. Pennsylvania employers meeting the city's conditions must register within 30 days of becoming such an employer.

Check the employee's city and county of residence and each regular worksite, then verify the local agency's rules. State withholding does not replace a required local account. Keep local workdays separately when the tax applies only to work in that locality, and check any refund or correction process with the local agency.

What changes when the employee moves during the year?

Recheck withholding, unemployment coverage, disability or leave contributions, and local taxes from the effective move and work-location dates. A new home address alone does not prove the employee's worksite changed, and a new worksite can matter even if residence stays the same. New York's withholding categories turn on residence and services; California's coverage tests turn on the pattern of services and other facts.

Record the last day at the old residence, the first day at the new one, every worksite change, and the first paycheck affected. Review any exemption certificate, update payroll settings and agency accounts, and retain the old and new state allocations for the year-end wage statement. When the facts are unclear, ask the agencies or get a payroll review before changing prior periods.

We withheld for the wrong state. How do we correct it?

First reconcile each pay period's work location, residence, wages, and actual tax deposits. Then follow each state's process for amending withholding and wage reports; do not assume a payment made to one state automatically moves to another. California EDD's correction page has separate procedures for returns, wage reports, and deposits, and says a quarterly adjustment cannot be processed before the original report is filed.

If a filed Form W-2 misstates state wages or tax actually withheld, follow the affected agencies' instructions to correct it and give the employee a corrected statement. Do not relabel tax paid to one state as withholding for another; New Jersey's instructions say its W-2 withholding entry must reflect tax actually withheld. Use Form W-2c, boxes 15–17 for state data and 18–20 for local data. For state- or local-only corrections, IRS instructions direct corrected forms to the affected agency and employee, not the SSA; ask the agency whether it needs Form W-3c. If federal boxes also change, follow the SSA's W-2c and W-3c instructions and check whether federal payroll returns need correction too.

An employer's amended payroll report is separate from an employee's state income tax return or refund claim. The employee may have to seek a refund from the state that kept the tax and settle tax in the correct state; Pennsylvania's guide describes the employee refund route for covered reciprocal-state wages. Give the employee corrected statements promptly, but do not promise a refund through payroll. If deposits or returns were missed, see behind on payroll taxes.

Unpaid payroll tax can reach a person. A sole proprietor directly owes federal employment taxes as the employer under IRC 3102(b), 3111, and 3403, without a willfulness test. A partner, officer, shareholder, or other person who controlled payment can face the federal trust fund penalty under IRC 6672 if they willfully fail to remit withheld federal taxes; the penalty equals unpaid income tax withholding plus the employee's share of FICA, and title alone is insufficient. The usual assessment period ends three years after the following April 15 or a later return filing; it does not start until a return is filed. Collection generally runs ten years after assessment, subject to statutory extensions. Separately, New York Tax Law §685(g) can make a person who willfully fails to remit its withholding liable for the unpaid tax plus interest. Its ordinary assessment limit is three years after the withholding return; a return filed before the following April 15 is deemed filed on that date, while an unfiled return leaves assessment open.

Example

Illustrative amounts in US dollars. A company based in Pennsylvania pays an employee $80,000 for the year. The employee lives in New Jersey and performs all regular work from home there, except for ten days at the Pennsylvania office. Assume $4,000 of wages relates to those office days, leaving $76,000 for New Jersey work. New Jersey requires employers of residents working there to register and withhold. If the employee and employer sign REV-419, the employer sends it to Pennsylvania and withholds New Jersey tax, Pennsylvania's reciprocal rule can remove Pennsylvania withholding on the covered compensation, including those office days. Without that treatment, the company must test Pennsylvania withholding on the Pennsylvania work. If the Pennsylvania office days are temporary or incidental, New Jersey's unemployment localization test points to New Jersey; confirm coverage with both agencies rather than splitting unemployment tax based on the $4,000 of office-day wages. Pennsylvania local wage tax may still apply to the office days.

Different for you?

• Your employee moved, has a regular split-state schedule, or prior pay was withheld for the wrong state: gather dated addresses, workday locations, pay records, state account IDs, deposits, and wage statements for bookkeeping help.
• You need basic payroll accounts for your first employee: see setting up payroll.
• The remote worker may create a business income or franchise tax filing duty: see business income tax in other states.
• Your company may need authority to do business in the worker's state: see registering in another state.
• The employee lives and works in Canada: see hiring an employee across the border.