How do teleworker taxes work? (2023)

Written by:Chase Charaba

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Posted on January 26, 2023.

If you haveremote employeesIn states other than where your organization is located, understanding tax rules can be challenging.

While remote work has been a phenomenon for decades, the COVID-19 pandemic and technological advances have made remote work an increasingly common practice for American workers.

According to McKinsey12022 American Opportunity Survey, 58% of employees work from home at least once a week, while 35% work remotely full-time. From 2023 onwards, these numbers may drop as many employers issueback to office plans. However, it is highly unlikely that remote work will disappear completely.

With so many people working from home, employers and state governments face new challenges around taxes, nexus and employee benefits. Each state has its own tax approach, and depending on where you live and work, your tax liability will vary.

This article explains how taxes work for remote workers, including the different types of remote workers, which states have unique tax circumstances, and how remote work affects employee benefits.

Want to offer employee benefits that work no matter where your employees live? Learn more about the Employee Benefit Scholarship

How are employees taxed when working remotely?

In a traditional way, face-to-face.DesktopWhere your employees live and work in the same state as your organization, there is less uncertainty to navigate. You simply withhold state income tax, if applicable in your area, and pay any necessary payroll taxes.

If employees are working remotely in the same state, these rules also apply, often with just a few changes to local taxes.

However, when employees are working remotely from another state, things can get complicated. Generally, your employees are taxed by the state where they live and work. You should speak with the employment and unemployment agencies in each state where your employees live and work to make sure you follow all proper procedures and withhold taxes.

For example, if your employee works for yourUtahorganization based in Oregon but live and work from home in Oregon, you must withhold all Oregon state and local income taxes from your wages and benefits. You will also need to pay any excise and unemployment taxes required for that location.

There are exceptions to this scenario. We'll cover some of them in the next section.

How taxes work for different types of remote workers

Remote work doesn't just mean working from home. There are many different types of remote workers, and each has different circumstances that could affect their taxes.

Employees traveling across state lines

Organizations close to state lines often hire out-of-state employees who travel across state lines. This is common in cities like Portland, Chicago, El Paso, Washington D.C. and New York City.

Unlike other remote workers, these commuters live in another state but work in the same state as your organization. This creates some unique income tax circumstances.

In that case, you and your employee may be subject to tax liability in both states. Reciprocal agreements, or a compromise between states that allow non-resident workers to claim the other state's tax exemption, exist in some places to avoid double taxation, but only a few states have one. In these situations, the employee's state of residence may issue a tax credit for any income paid to the state of their organization.

For example, according to the state of Maryland2, state residents who work in Washington, DC, Pennsylvania, Virginia, or West Virginia file their state income taxes for Maryland only, thanks to a reciprocal agreement with those locations.

Another consideration is unemployment withholdings. In that case, you typically pay unemployment tax in the employee's home state.

Employees who live out of state and work from home

If you have an employee who works remotely in a state other than your location or employees inseveral states, you must withhold income tax from the state in which you live and work. You will pay unemployment taxes and report your income in the states you live in, not your state.

However, some states use "employer convenience" rules that require you to pay taxes in your state, not the employee's state. Additionally, double taxation risks, such as those for employees traveling between states, may still exist in some states.

Forindependent contractors, taxes are different. Since 1099 contractors are not employees, they must pay their taxes as self-employed in their state of residence (if they work remotely).

If you have employees who have recently moved to a new state and are working remotely, they will need to establish a new address or permanent residence to avoid paying taxes in their current and previous states. Many states will audit former residents to determine if they are no longer residents. The more evidence your employees have that they live in their new state, the harder it will be for their old state to claim them as residents for tax purposes.

Some steps your employees can take to establish the address include:

  • Update your mailing address for all invoices
  • Get a driver's license in your new state
  • register to vote
  • Close any bank account in its previous state
  • Buy or rent a home in your new state

Employees working temporarily out of state

So far, we've talked about permanent and contract employees who are permanent residents of their respective states. What if you have employees temporarily working remotely?

Suppose your temporarily remote employee normally works in the same state or location as your organization, but is currently working remotely in another state. Temporary remote workers are expected to return to their permanent location. Otherwise, they are considered permanent residents of the other state.

Each state has its own rules about how long an employee can work in that state as a non-resident or partial resident with no income tax due. However, in some cases, an employee may be required to file non-resident tax returns.

convenience rule states

Some states have an employer suitability test or suitability rule. This test requires you to withhold and pay taxes in the state where your organization is located, even if your employees live out of state, if they do so out of convenience. Unless you specifically require your out-of-state workers to be remote in your state, you must withhold your state tax.

The states with employer convenience rules are:

  • Arkansas
  • Connecticut
  • Delaware
  • Nebraska
  • New York
  • pennsylvania

This means that if your organization is headquartered in New York but you have an employee who works from home in Utah, you must withhold New York taxes.

How does remote work affect nexus sales and taxes?

In many states, having an employee or any official presence triggers a sales tax nexus for your organization. This is further complicated by local tax jurisdictions such as counties and cities.

Suppose you become responsible for collecting and remitting state sales tax due to remote work. In that case, you will need to register for a sales tax license and file sales tax returns in that state according to the schedule applicable to your business (usually based on the number or amount of transactions).

How does remote work affect employees' taxable benefits?

If you offer taxesemployee benefitsasemployee stipends, you will also need to report additional taxable income to states that require it. This is because taxable benefits are considered additional income and must be reported on the employee's Form W-2. This affects the total amount of taxable wages and individual income tax withholdings for your employees.

What remote work taxes are employers liable for?

At the federal level, employers are required to withhold federal income tax, Social Security taxes, Federal Unemployment Tax (FUTA) and Medicare taxes for all W-2 employees, including remote workers.

There are also state income taxes and state unemployment tax assessment (SUTA) taxes that may differ by location. For example, some states, such as Washington, have no state income tax on wages. However, Washington has unique employment taxes and mandated benefits such as paid family, sick leave, and sick leave. You should check with each state you have employees in to see what taxes you are liable for.

The states without income tax are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • Dakota del Sur
  • Tennessee
  • Texas
  • Washington
  • Wyoming

There are also local taxes that you may be required to pay or withhold from your employees' paychecks, depending on your state of residence.

Other considerations about remote work

In some states, you may also be required to reimburse your employees forremote work costsas the tools you need to do your job.

One way to ensure you continue to deliver on these statements while benefiting your entire remote team is to offer an employee salary for remote work. This allows you to give your employees tax relief for remote work expenses, such as Internet access costs,mobile billsand home office setup costs.

You should also write a company policy for reimbursement of remote work expenses in accordance with local laws.


You may be liable for additional employer sales tax and withholding liabilities if you have workers in another state who do not work in a company office. However, this differs depending on the states where your employees live and where your organization is located.

Allowing your employees to work remotely in other states can create challenges for your organization, but it also increases productivity,employee retentionand employee morale and helps create a more inclusive company culture that can benefit you more in the long term.

Be sure to consult a tax advisor to ensure compliance with all laws applicable to your organization.

If you're new to offering employee benefits across state lines, we can help! Connect with a personalized benefits advisor for a one-on-one chat to see which benefits work best for your organization

This blog article was originally published on July 6, 2022. It was last updated on January 26, 2023.




Originally published January 26, 2023. Last updated January 26, 2023.

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