A business that hires one remote employee in another state can take on payroll registrations, withholding, unemployment insurance and sometimes local taxes in that state. The same issues come up when employees travel for work, split time between two states or live in one state and commute to another. The details differ by state, so the safest approach is to treat every new work or home address as a payroll event and check before the next paycheck.
Work state, home state and credits
Most states tax wages for work done inside the state, whether the employee lives there or not. Many states also tax residents on all their income wherever earned. When both apply, the employee generally claims a credit on the home-state return for tax paid to the work state, but employer withholding set-up still matters because the employee should not be left with a surprise bill. The result depends on the specific pair of states.
Employers should collect new withholding forms whenever an employee's home or work location changes, and watch for employees who tell you they have moved.
Reciprocity agreements
Some neighboring states agree that an employee who lives in one and works in the other is taxed only by the home state. Illinois has agreements of this kind with Iowa, Kentucky, Michigan and Wisconsin. An employee who lives in one of those states and works in Illinois can give the Illinois employer a completed Form IL-W-5-NR and be exempt from Illinois withholding. The employer must have the form on file, and the employee must notify the employer within ten days of a change of residence.
Reciprocity is limited to the states that have signed on and generally addresses only state income tax withholding. Do not assume it also covers local taxes, unemployment insurance or other payroll programs. See state income tax withholding.
Convenience-of-the-employer rules
A few states tax nonresident employees who work for an in-state employer even on days worked from home in another state. New York is the best-known example. Its tax return instructions for nonresidents say days worked outside New York count as out-of-state only if the employer's necessity, rather than the employee's convenience, requires the work to be done elsewhere. Under that rule, normal work days spent at home are generally treated as New York work days. If you have remote staff working for a New York location, ask about this rule before you set up withholding.
Short-stay and travel rules
Some jurisdictions exempt brief work visits from withholding, and the thresholds are not consistent. For example, Indiana's Department of Revenue says that for withholding on or after January 1, 2024, an employer need not withhold state or county tax on certain nonresident employees expected to work in Indiana 30 days or fewer in a taxable year. Ohio municipalities generally do not require withholding for pay earned from 20 or fewer days in the city, with exceptions. Pennsylvania has a 90-day line for local tax on temporary assignments. Track employees' days in each location and keep travel records.
Unemployment insurance
State unemployment insurance generally covers an employee's wages in one state only. States commonly decide which one by looking at where the work is mainly performed and, if that is unclear, where the employee's base of operations is, where the employer directs and controls the work, and where the employee lives. Registration and quarterly reports then go to that state. See state unemployment insurance.
Local and transit taxes
Local taxes can follow the employee's address. Oregon shows the variety. Its statewide transit tax is 0.1% of wages, withheld by employers from Oregon residents wherever they work and from nonresidents who work in Oregon. The Oregon Department of Revenue's page tells employers to keep withholding at that rate and notes that Measure 120 did not pass in the May 19, 2026 primary. TriMet and Lane County transit taxes are separate. They are imposed on the employer, based on gross payroll earned within the district, and they include remote employees working from home in the district. See local payroll taxes.
New hire reporting and paid leave
Federal law requires new hires to be reported to the state where the new employee works, usually within 20 days of hire, and some states require it sooner. If you have employees in several states, you may either report each hire to the state where the employee works or register as a multistate employer and report all new hires to one chosen state. See new hire reporting.
Many states also have paid sick leave rules and paid family and medical leave programs that follow the employee's work location. See state paid family and medical leave.
Example: a remote employee in another state
Example. An Illinois company hires a bookkeeper who lives and works from home in Pennsylvania. The checklist usually includes: Pennsylvania withholding and unemployment registration, the local earned income tax and local services tax for the employee's municipality, new hire reporting to Pennsylvania, workers' compensation coverage in Pennsylvania, and a review of whether the employee's presence creates other state tax filings for the business. The company may not owe Illinois withholding on that employee at all.
Common mistakes
- Continuing to withhold only for the employer's home state after an employee moves.
- Treating a one-time visit and a recurring assignment the same way.
- Missing local taxes that depend on the employee's address.
- Hiring in a new state without checking workers' compensation.
- Forgetting that the business itself may have filing obligations in the state beyond payroll. Our multi-state tax service can help.
How we can help
We map each employee's work and home locations, register the business where needed, and set up payroll for federal, state, county and city taxes. See our payroll services.
Frequently asked questions
Which state do I withhold for if an employee lives in a different state?
Usually the work state, and sometimes the home state as well. A reciprocity agreement may change that. Check both states' rules and the employee's forms.
Does one remote employee create a payroll obligation in another state?
Often yes, including withholding, unemployment insurance and workers' compensation in that state. Confirm before the first payroll.
Are all states covered by reciprocity agreements?
No. Only some states have them, and only with certain neighbors.
Official sources
- Illinois Department of Revenue: Form IL-W-5-NR
- New York State Department of Taxation and Finance: IT-203-I instructions
- Oregon Department of Revenue: Statewide transit tax
- Indiana Department of Revenue: Departmental Notice #1
- Administration for Children and Families: New hire reporting
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.