Remote Work Taxes: Expert Guide for Tax Season This Year

Simple enough. But that principle has several major exceptions that HR teams and remote employees need to understand before they get it wrong.

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Types of remote workers and how their taxes differ

Not all remote workers are taxed the same way. The first step to getting compliance right is understanding what kind of worker you're dealing with.

1. Permanently remote employees work for a company located in a different state or country on an ongoing basis. Their tax obligations depend on agreements, reciprocity, tax treatie, between the jurisdictions involved.
2. Temporarily relocated employees may work in a different state for a short-term project or business trip. Depending on the duration and the states involved, they may trigger tax obligations in two states at once.
3. Hybrid workers split their time between home and an office in a different state. They typically need to apportion their income by the number of days worked in each location and may need to file in both states.
4. Digital nomads move frequently, sometimes across international borders. Their tax situations are among the most complex, as they may trigger residency tests in multiple countries.
5. Workers in co-employment arrangements, such as those managed through a PEO company, have tax obligations that are shared between the employer and the PEO. The employment contract determines legal responsibility.
6. Independent contractors are self-employed and fully responsible for their own taxes, including self-employment tax, estimated quarterly payments, and all applicable state filings.

Understanding which category applies to each worker on your team shapes every decision that follows.

The critical issue of employee misclassification

Before going further: worker classification matters enormously for tax purposes, and getting it wrong is expensive.

Employee misclassification occurs when a worker who functions as an employee is labeled an independent contractor, or vice versa. The IRS scrutinizes this classification carefully, and the consequences of misclassification flow in both directions.

For employers: misclassifying an employee as a contractor means you may owe back taxes, interest, and penalties for all the payroll taxes you failed to withhold and remit. Plus potential liability for back benefits.

For workers: being misclassified as a contractor means losing out on employer contributions to Social Security and Medicare, and being personally responsible for the full self-employment tax (15.3%), which they would have shared with an employer if correctly classified.

Audit your worker classifications against IRS guidelines regularly, especially as you scale a remote workforce.

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For employers: state withholding, nexus, and compliance obligations

This section is aimed at HR leaders, payroll managers, and finance teams managing remote employees across state lines.

State income tax withholding: the basic rule

As noted above, you generally withhold state income tax based on where the employee physically works. If you have a remote employee in California, you withhold California income tax. If you have one in Texas, which has no state income tax, no withholding is required for that state, though other obligations (more on those below) may still apply.

At the federal level, the rules are uniform: all W-2 employees, wherever they work, require you to withhold federal income tax, Social Security (6.2%), Medicare (1.45%), and to contribute to FUTA (Federal Unemployment Tax).

State-level withholding is where it gets complicated. HR software with built-in multi-state payroll capabilities can automate much of this, but you still need to understand the rules to configure it correctly.

The convenience of the employer rule

The most misunderstood rule in remote work taxation is the convenience of the employer (COE) rule. This rule flips the standard "work location" principle on its head: it allows certain states to tax remote workers' income as if they were working in the employer's state, even when they're physically located elsewhere.

The rule applies only when the employer is based in one of these states and the employee works remotely by choice (for their convenience), rather than because the employer requires it. As of 2026, eight states apply the COE rule. They are Alabama, Connecticut, Delaware, Nebraska, New Jersey, New York, Oregon and Pennsylvania.

State	What triggers "employer necessity"?
New York	Employer must require remote work as a genuine business condition, not just permit it
Pennsylvania	Employer-required remote work; employee must demonstrate necessity
Delaware	Employer-required; few formal exemptions defined
Nebraska	Employer-required; domicile-based test also applies
Alabama	Employer-required remote work arrangement
Oregon	Employer must specifically require the out-of-state location
Connecticut	Employer-required and documented
New Jersey	Employer-required; rule enacted July 2023

New York's version is the most aggressive and most litigated. In May 2025, New York's Tax Appeals Tribunal upheld the COE rule in the Zelinsky case, affirming that simply hiring someone remotely because they live there does not constitute employer necessity, meaning the employer's-state tax still applies. An appellate challenge is ongoing, so this remains active case law to monitor.

In practice: if your company is headquartered in New York and your remote employee in Ohio is working from home for their own convenience (not because you require them to), New York may still expect income tax on those wages, on top of any Ohio obligations. This is one of the most common sources of double-taxation disputes in remote work.

New Jersey and Connecticut have similar rules, but with a mutuality requirement, they only trigger the COE test if the employee's home state also has a COE rule.

For employees: if your employer is based in one of these eight states and you work remotely by choice, check whether you may owe income tax in both your state and your employer's state.

Reciprocity agreements: where they simplify things

If your employee lives in a state with a reciprocal agreement with your company's state, the withholding picture simplifies considerably.

State	Has reciprocity with
Arizona	California, Indiana, Oregon, Virginia
DC (Washington D.C.)	Maryland, Virginia
Illinois	Iowa, Kentucky, Michigan, Wisconsin
Indiana	Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin
Iowa	Illinois
Kentucky	Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin
Maryland	DC, Pennsylvania, Virginia, West Virginia
Michigan	Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
Minnesota	Michigan, North Dakota
Montana	North Dakota
New Jersey	Pennsylvania
North Dakota	Minnesota, Montana
Ohio	Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
Pennsylvania	Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
Virginia	DC, Kentucky, Maryland, Pennsylvania, West Virginia
West Virginia	Kentucky, Maryland, Ohio, Pennsylvania, Virginia
Wisconsin	Illinois, Indiana, Kentucky, Michigan

Make sure employees complete the appropriate exemption certificates so you don't withhold for the wrong state.

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Understanding nexus: when one remote hire creates a tax footprint

Nexus is the legal term for a business having sufficient presence in a state to be subject to its tax laws. Before remote work became widespread, nexus typically required a physical office or warehouse. That's no longer the case.

In most states today, a single remote employee can create nexus, which can trigger:

• State income tax withholding registration
• State unemployment insurance (SUI) account registration
• Workers' compensation insurance requirements in that state
• Potential corporate income or franchise tax filing obligations
• In some cases, sales tax collection obligations

Nexus does not disappear when the employee leaves. Once established, it typically requires formal deregistration.

Common nexus mistakes to avoid:

• Hiring a remote employee in a new state without first registering payroll accounts ("quiet payroll nexus")
• Assuming a no-income-tax state has no obligations, Washington has no income tax on wages but does require employer contributions to paid family and medical leave, long-term care insurance, and paid sick leave
• Believing Public Law 86-272 provides blanket protection, it only shields tangible goods sellers from state income tax, and only for solicitation activities

If an employee works in multiple states, tax apportionment may be required, assigning income proportionally to each state based on days worked there. Payroll software with multi-state apportionment capabilities can automate this, but accurate day-tracking by employees is essential.

States with no income tax, but other obligations still apply

Nine states currently impose no income tax on employee wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Note: New Hampshire and Tennessee phased out their taxes on interest and dividends in 2025, making them fully income-tax-free. However, employers with remote workers in these states are not off the hook. Every state has some form of payroll obligation, unemployment insurance, workers' compensation, and state-specific mandates. Washington is the most prominent example: no income tax, but significant employer contributions required for paid family leave, long-term care, and paid sick leave programs.

Always check each state's full employment tax picture, not just whether it has an income tax.

New-state hire compliance checklist

When you hire a remote employee in a state where your company has no prior presence, work through this sequence before their first paycheck:

1. Determine nexus implications: confirm which state taxes and registrations apply
2. Register for state income tax withholding: most states require employer registration before withholding begins
3. Set up a state unemployment insurance (SUI) account: SUI rates and requirements vary by state and are separate from FUTA
4. Obtain workers' compensation coverage: requirements and acceptable providers vary significantly
5. Confirm local tax obligations: some cities and counties have their own income taxes (e.g., New York City, Philadelphia, Denver)
6. Check state-specific mandates: paid family leave, paid sick leave, disability insurance, long-term care contributions
7. Update payroll configuration: apply the correct withholding rates, verify the convenience rule doesn't apply, check for reciprocity agreements
8. Notify the employee of their obligations: they may also need to update their withholding elections (W-4 equivalents)

For complex multi-state scenarios, or if you're scaling quickly across many states, partnering with an Employer of Record can handle these steps on your behalf.

Employer tax obligations: summary

• Withhold and remit federal income tax, Social Security, Medicare, and FUTA for all W-2 employees
• Withhold and remit state income tax based on the employee's work location (subject to COE rules and reciprocity agreements)
• Contribute to state unemployment insurance in the employee's state
• Maintain workers' compensation coverage per state requirements
• Report income to all applicable states: especially when employees are distributed across jurisdictions
• Maintain accurate payroll records including employee work locations, with documentation of any location changes

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For employees: where you owe taxes and how to protect yourself

This section is for remote workers trying to understand their own filing obligations.

Where do you pay taxes when you work remotely?

The short answer: you generally pay taxes in the state where you physically do your work. If you live and work in Colorado for a New York-based company, you pay Colorado income taxes, and you also pay federal income taxes as you would regardless of location.

But there are important exceptions that can complicate this:

• If your employer is based in one of the eight COE-rule states and you work remotely by choice, you may also owe taxes in your employer's state
• If you work from multiple states throughout the year, you may need to file non-resident returns in each state where you worked
• If your employer doesn't withhold for your state, you're responsible for making estimated quarterly payments yourself

Tax residency and the 183-day rule

Each state defines tax residency differently, but most use some version of the 183-day rule: spend more than 183 days in a state in a calendar year and you're generally considered a tax resident there, triggering full filing obligations.

For people who moved states mid-year, you may be a part-year resident of two states and need to file part-year resident returns in both.

For digital nomads and frequent travelers, the residency question becomes genuinely complex. The key factors most states look at include:

• Where your permanent home (domicile) is located
• Where your economic interests and family ties are centered
• How many days you spent in each state
• Where you're registered to vote, where your driver's license is issued, and where your car is registered

Important distinction: "residence" and "domicile" are not the same. A residence is where you happen to be living temporarily; your domicile is your permanent home, the place you intend to return to. States use domicile to determine long-term residency status and tax obligations.

Multi-state filing: when you need to file in more than one state

If you physically worked in more than one state during the year, you likely need to file in both. Most states require you to allocate income based on the number of days worked in each location. Hybrid workers who commute a few days a week across state lines are especially affected, you'll need accurate records of your day-by-day work location.

To avoid paying full taxes twice on the same income, most states offer a credit for taxes paid to another state. This credit doesn't always cover the full amount, especially if tax rates differ, but it prevents true double-taxation in most cases.

If your employer doesn't automatically withhold for every state where you work, you're responsible for estimated quarterly tax payments to those states. Missing these can result in underpayment penalties even if you settle up at tax time.

What employees must do

• Notify your employer promptly any time you change your work location, even temporarily, so they can adjust withholding correctly
• Check whether your home state and employer's state have a reciprocity agreement that could simplify your filing
• Track the days you worked in each state throughout the year, especially if you travel for work or split time between locations
• File a non-resident return in any state where you earned income but are not a resident
• Make quarterly estimated payments if your employer doesn't withhold for a state where you owe taxes
• Consult a tax professional for multi-state scenarios, the interaction between residency rules, COE rules, and reciprocity agreements can produce unexpected results

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Tax deductions for remote workers in the US

The TCJA rule and why most W-2 employees can't deduct home office expenses

Prior to the 2018 Tax Cuts and Jobs Act (TCJA), employees could deduct unreimbursed work-related expenses on their federal returns. The TCJA eliminated this deduction for W-2 employees through 2025. The current Trump administration has signaled its intention to extend the Act, so this restriction is likely to remain in place beyond 2025.

If you're a W-2 employee, you generally cannot deduct home office expenses on your federal return, even if you work from home full-time and your employer provides no reimbursement.

State-level exceptions: 13 jurisdictions still allow W-2 deductions

Here's what many guides miss: several states and jurisdictions still allow W-2 employees to deduct unreimbursed employee expenses on their state returns, even when the federal deduction is unavailable. If you work remotely in any of the following, check your state's rules:

• California
• Illinois
• Iowa
• Massachusetts
• Minnesota
• Montana
• New Hampshire
• New York
• North Dakota
• Pennsylvania
• South Dakota
• the District of Columbia
• Seattle (city-level)

If you're in one of these jurisdictions, unreimbursed expenses, a dedicated home office, internet, a work phone, may be deductible on your state return. Keep receipts and documentation.

Employer reimbursement obligations

Some states legally require employers to reimburse remote workers for work-related expenses. California is the most prominent example: employers there must reimburse employees for all necessary business expenses, including a portion of internet and phone costs. Illinois, Iowa, Massachusetts, Montana, and the District of Columbia have similar requirements.

If you're an employer with remote workers in these states, failing to reimburse required expenses exposes you to penalties. Consider a clear remote work stipend policy and audit your reimbursement practices by state.

Deductions for self-employed workers and independent contractors

If you're self-employed or working as an independent contractor, the picture is much more favorable. You can deduct ordinary and necessary business expenses from your self-employment income, including:

• Home office equipment (computers, monitors, phones, furniture)
• Telecommunication costs (internet and phone service used for work)
• Utilities, proportional to home office use (electricity, gas, heating)
• Insurance (business-related portions)
• Business-related banking fees and business license fees
• Business meals (subject to the 50% limitation)
• Work-related travel expenses
• A portion of rent or mortgage interest, based on home office square footage

The home office deduction. Available only if you maintain a space used exclusively and regularly for business, is calculated using one of two methods:

Standard Method: Divide your home office square footage by your total home square footage. That percentage applies to your actual home expenses.

Example: 200 sq ft office ÷ 2,000 sq ft total home = 10% of home expenses are deductible

Simplified Method: Multiply your office square footage by $5 per square foot, up to a maximum of 300 square feet.

Example: 200 sq ft × $5 = $1,000 deductible per year

The Simplified Method is easier to calculate; the Standard Method often produces a larger deduction if your actual home expenses are high. Run both calculations to determine which benefits you more.

You can also use expense management software to track your expenses year-round. Here's a practical overview of simple expense management software to help you choose the right tool.

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International remote work taxes

Tax implications of hiring remote workers internationally

Expanding your talent pool by hiring remote workers across international borders introduces a new layer of tax complexity. Employers must navigate tax laws that vary dramatically by country, and mistakes can be costly.

Key obligations to understand:

Tax liabilities in the employee's location: You may be required to comply with local tax and employment laws, including income tax withholding, social security contributions, pension requirements, and mandatory benefits, in the country where your employee resides and works.

Payroll registration: Many countries require foreign employers to register a local payroll entity before they can legally pay employees. Without this, you may be forced to use an Employer of Record to employ the worker on your behalf. For nearshore hiring in Canada specifically, here's a guide to the best Canadian EOR companies.

Permanent establishment risk

One of the most serious, and most overlooked, risks in international remote hiring is permanent establishment (PE). A PE is created when your company has a sufficient taxable presence in a foreign country, which can happen simply by having an employee working there on an ongoing basis.

Once a PE is established, the foreign country may require you to:

• File corporate tax returns in that jurisdiction
• Pay corporate income tax on profits attributable to that presence
• Register for local VAT or goods and services taxes

This can happen without any deliberate effort on your part, a single employee working permanently from their home in Germany, for example, can create a German PE for a US company. Consult a tax professional before making your first international hire.

How to determine tax residency for international workers

Your employee's tax obligations internationally are primarily determined by their country of tax residence, which is the country where they live and have their primary economic ties.

Most countries use some version of the 183-day rule: spend more than half the tax year in a country and you're generally considered a tax resident there. However, the specific rules vary, some countries use calendar-year counting, others use rolling 12-month periods, and some have additional tests based on domicile and economic interests.

For US citizens working abroad, the rules are unique: the US taxes its citizens on worldwide income regardless of where they live. However, two key reliefs are available:

• The Foreign Earned Income Exclusion (FEIE) allows qualifying US citizens abroad to exclude a portion of foreign-earned income from US tax (the 2025 exclusion amount is $130,000)
• Foreign tax credits allow US citizens to offset US tax liability with taxes already paid to a foreign country, reducing or eliminating double taxation

To qualify for the FEIE, the employee must meet either the bona fide residence test (residing in a foreign country for a full tax year) or the physical presence test (being outside the US for at least 330 days in a 12-month period).

For digital nomads frequently crossing borders, tax home determination can be genuinely complex. Consulting a tax advisor who specializes in international taxation is strongly recommended.

What is a Double Taxation Agreement (DTA)?

A Double Taxation Agreement (DTA): also called a tax treaty — is a bilateral arrangement between two countries designed to prevent the same income from being taxed twice. The US has DTAs with more than 60 countries.

Key points about how DTAs work for remote workers:

• DTAs typically define which country has primary taxing rights over different types of income
• They often provide for reduced withholding tax rates on dividends, interest, and royalties
• They specify the rules for determining tax residency when a person could be resident in both countries
• Tax returns may still need to be filed in both countries even when a DTA applies and reduces the actual tax liability to zero

For employers: understanding which DTAs apply to your international employees is essential for structuring contracts and payroll correctly. Work with specialized tax consultants or build expertise in-house. Don't assume a DTA eliminates all obligations as it reduces them in defined ways.

Best practices for managing cross-border employment taxes

• Understand local regulations before making an international hire, income tax, social security, pension contributions, and mandatory benefits vary enormously by country
• Maintain accurate records of employee locations, contracts, and all tax forms; leverage payroll software with international compliance features
• Establish clear remote work policies that specify where employees are and are not authorized to work, and update employment contracts when arrangements change
• Conduct regular compliance audits, particularly as pandemic-era accommodations have expired and many countries have tightened enforcement of cross-border employment rules
• Partner with an EOR or global payroll provider for countries where you lack local expertise or entity, they assume legal employer responsibility and handle local compliance

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What changed in 2026: rules you need to know now

Remote work tax rules have been in flux since the pandemic. Here's what has changed and what to watch:

Pandemic-era accommodations have expired. Several states (including Georgia, Indiana, and Minnesota) had issued guidance during the pandemic temporarily excusing remote workers from nexus-triggering obligations. Those accommodations have ended. Standard pre-pandemic sourcing and withholding rules are back in effect. If your team has grown across state lines since 2020 and you haven't revisited your compliance posture, now is the time.

New York COE rule upheld in Zelinsky (May 2025). The New York Tax Appeals Tribunal reaffirmed that hiring someone remotely because that's where the candidate lives does not constitute employer necessity. Remote work done for personal preference remains subject to New York withholding for New York-based employers. An appellate challenge is pending, so this could still evolve, but for now, New York's rule stands.

TCJA deduction restrictions remain in place. The Tax Cuts and Jobs Act's suspension of miscellaneous itemized deductions for W-2 employees continues through 2025. The current administration has signaled an intent to extend these provisions, so employees should not count on the federal home office deduction being reinstated soon.

State withholding enforcement is increasing. California, New York, and several other high-tax states are increasingly auditing remote worker residency claims and multi-state income reporting. Employees who claim to have moved out of state but maintain strong ties to their former state are a particular audit focus. Documentation of domicile changes is more important than ever.

No-income-tax state updates: New Hampshire and Tennessee both phased out their investment income taxes effective January 1, 2025, making them fully wage-income-tax-free. If you had employees in these states and were withholding on investment income, update your configurations.

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Services and resources to help manage remote work taxes

Employer of Record (EOR) services

For companies looking to hire international workers or rapidly expand across US states, an EOR is often the most efficient compliance path. The EOR becomes the legal employer of record in each jurisdiction and assumes responsibility for payroll, tax withholding, social contributions, and compliance with local employment law.

Key EOR benefits include:

• Comprehensive tax management: The EOR handles withholding, remittance, reporting, and statutory contributions in each jurisdiction
• Legal risk transfer: The EOR assumes employer liability, significantly reducing compliance risk for your company
• Up-to-date expertise: EORs track changing tax regulations so your team doesn't have to
• Speed: You can hire in a new state or country in days, not months

Top EOR options are reviewed in our guide to the best Employer of Record services. For example, Globalization Partners is a strong choice for companies expanding internationally.

Global payroll services

Global payroll services manage payroll processing across multiple countries from a single platform, without assuming legal employer status. Key features to look for:

• Multi-currency payments with compliant local payroll processing
• Automated tax calculations and filing across jurisdictions
• Integration with your existing HRIS
• Real-time payroll analytics and cost visibility

Unlike EORs, global payroll providers require you to have (or establish) a local entity in each country. They're best suited for companies that already have legal presence in multiple jurisdictions and need a more efficient way to manage the complexity.

Business tax software

Good business tax software automates much of the calculation and filing work for multi-state US payroll, integrates with your HR systems, and reduces the risk of manual errors. For US-only distributed teams, this is often the most cost-effective compliance tool. For international teams, you'll typically need global payroll or EOR capabilities in addition.

FAQs

What is the "convenience of the employer" rule?

The COE rule applies in eight states (Alabama, Connecticut, Delaware, Nebraska, New Jersey, New York, Oregon, and Pennsylvania). It allows those states to tax a remote employee’s income as if they were working in the employer’s state, even if they’re physically somewhere else, when the remote arrangement exists for the employee’s convenience rather than employer necessity. New York’s version is the most actively enforced and recently reaffirmed (May 2025).

Can a remote worker be double-taxed?

Yes. Remote workers can face double taxation when two jurisdictions both claim taxing rights over the same income. This happens most often between states that apply the convenience of the employer rule and the employee’s home state, or internationally when a country taxes the same income as the US. Most jurisdictions offer credits, treaties, or reciprocal agreements to mitigate this, but they don’t always fully eliminate double taxation.

Which US states have no income tax?

Nine states have no income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. However, no income tax doesn’t mean no payroll obligations, Washington employers, for example, still contribute to paid family leave, long-term care, and paid sick leave programs. Always check a state’s full payroll picture before assuming a clean slate

What tax forms do I need when paying remote contractors in the US?

Three forms to know: have the contractor complete a W-9 before work begins, file a 1099-NEC for each contractor paid $600 or more during the year, and submit Form 1096 to the IRS as a summary of all your 1099s. Both the 1099-NEC and 1096 are due January 31. Missing or late 1099s carry penalties of $60–$630 per form depending on how late they are filed.

If you work remotely, where do you pay taxes?

In most cases, you pay taxes in the state or country where you physically perform your work. If your employer is based in a different jurisdiction, you may also have obligations there, particularly if the employer’s state applies the convenience of the employer rule. Always verify with a tax professional for your specific situation, and check whether a reciprocity agreement exists between your state and your employer’s.

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This article is for informational purposes only and does not constitute tax or legal advice. Tax laws change frequently and vary by jurisdiction. Consult a qualified tax professional for guidance specific to your situation.

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You should also read:

• What is an Employer of Record?
• Employer of Record Benefits
• How Can a US Company Hire a Foreign Employee?
• Benefits of Remote Teams
• Employee Misclassification: What HR Needs to Know