Workers will typically file federal and state taxes based on where they physically work, not where their employers operate. There are two types of taxes that workers in the United States need to file: federal and state. The general rule for state income tax is that you are liable for state taxes based on where you are when you perform the work.
For federal taxes, the process is relatively straightforward and is based on where you were physically performing the work. State taxes, however, can be much more complicated, and the rules differ from state to state.
The easy rule is that you must pay non-resident income taxes for the state in which you work and resident income taxes for the state in which you live, and you must file income tax returns for both states.
There are some exceptions to this general rule. One exception occurs when one state does not impose income taxes. The other exception occurs when a reciprocal agreement exists between the two states.
As of 2020, employees are free from state taxes in:
Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington
Wyoming
If you work in one of these nine states but live in one of the other 41 states that do impose a state income tax, you will generally only pay resident state income taxes for the state where you live. Similarly, if you live in one of these nine states but work in one of the other 41, you would only pay nonresident taxes for the state where you work.
Some states have reciprocal tax agreements. Reciprocal agreements allow residents of one state to work in a neighboring state without having to file nonresident state tax returns in the state where they work. For example, if you live in Milwaukee but commute to Chicago, your employer would only deduct Wisconsin state taxes from your paycheck.
If you work across state lines in a state with no reciprocal tax agreement, then you will need to file an income tax return for both states. However, you should be able to claim a credit on your resident state income tax return for the state income tax that you paid in the nonresident state.
Note that reciprocity is not automatically awarded. You will have to file a request with your employer to deduct income taxes based on your state of residence rather than where you work. Unless you make a formal request with your employer, you will be taxed by both states, and you will be obligated to file both state income tax returns.
FAQs
If you earn income in one state while living in another, you should expect to file a tax return for the state where you are living (your “resident” state). You may also be required to file a state tax return where your employer is located or any state where you have a source of income.
Do you pay local income tax where you live or work? ›
Local income tax might be withheld on wages you earn inside city, county, and school district boundaries. If you live or work in an area that levies a tax, your wages will be taxed by that jurisdiction.
Do I have to pay taxes in two states if I work remotely? ›
A worker may have tax obligations in any state where they reside and possibly the state where their employer's worksite is located. A permanent remote worker will file their personal income taxes in their state of residence, whether they are a W-2 employee or a 1099-NEC independent contractor.
How do you pay employees who live and work in different states? ›
Generally, if an employee lives in one state and works in another, you must withhold taxes for the state they work in. But if their home and work states have a reciprocal agreement, the employee can give you a reciprocal withholding certificate to request that you withhold taxes for their home state.
Do I have to pay Illinois state income tax if I live in Florida? ›
It Is All About “Domicile”
Illinois residents pay Illinois taxes. Arizona residents pay less income tax and Florida residents pay no income tax. But while you can live in more than one state during any given year, you can only be a resident of one state for tax purposes.
Why do I get taxed so much on my paycheck 2023? ›
The agency adjusted many of its 2023 tax rules to help taxpayers avoid "bracket creep." That's when workers get pushed into higher tax brackets due to the impact of cost-of-living adjustments to offset inflation, despite their standard of living not having changed.
Who has to pay local income tax? ›
Local income tax is a type of tax some local governments impose on people who live or work in a specific area. The local income tax is in addition to federal income and state income taxes. Only localities in states with state income tax impose a local income tax.
What state do you pay income tax to if you work remotely? ›
If you have a telecommuting employee in a different state than your location or employees in multiple states, you must withhold income taxes for the state they live and work in. You'll pay unemployment taxes and report their income to the states where they live, not your state.
What taxes do I pay if I work remote? ›
Remote workers have to pay two types of taxes: federal (or national) and regional. The federal (national) taxes are those paid to the overall government, while the regional taxes are paid at a state, local, or provincial level. Those taxes will often apply to wherever you receive an income.
How does income tax work with remote jobs? ›
Remote Work Doesn't Usually Affect Federal Income Taxes
Your employer would withhold taxes from your paychecks just as it did before, no matter where you live and work.
If you live in one state and work in another, taxes can be complicated. And the rules can vary significantly from state to state. Some states with a lot of commuters have reciprocity agreements, so you're only taxed by your state of residence even if you cross state lines to go to work.
How do I fill out a w4 if I live in one state and work in another? ›
The general rule is: your report all your income on your home state tax return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. Your home state will give you a credit, or partial credit, for what you paid the non-resident state.
Can an employee work remotely from another state? ›
The general rule is that employees owe state income taxes to the state where they live and work. If those two states are different, figuring out an employee's tax obligation can get more complicated. Though it isn't the case for all remote workers, many employees are able to work from anywhere with a remote job.
Do I pay state taxes if I live in Georgia but work in Florida? ›
The easy rule is that you must pay non-resident income taxes for the state in which you work and resident income taxes for the state in which you live, while filing income tax returns for both states. However, this general rule has several exceptions. One exception occurs when one state does not impose income taxes.
Why is Florida a tax free state? ›
In 1968, the Florida Constitution was ratified to prevent the state from collecting an income tax. And the state constitution protects taxpayers from having the state impose new taxes or raise them.
How does Florida afford no state income tax? ›
With no state income tax — the state constitution forbids it — Florida's state government generates the bulk of general revenue (75% to 80% depending on the year) from sales tax collections. It gets the rest from a variety of sources, including documentary stamp taxes, insurance taxes and corporate income taxes.
How is local income tax calculated? ›
How to calculate local income tax: 6 steps
- Find gross pay. First things first, calculate your employee's gross wages. ...
- Determine if employee has pre-tax deductions. ...
- Subtract any pre-tax deductions. ...
- Determine taxable wages. ...
- Compute local income tax based on guidelines. ...
- Withhold local income tax from employee wages.
There are many different types of local taxes, including property taxes, sales taxes, and lodging taxes. Property taxes are the most common and are typically based on the value of a property.
How is PA local tax calculated? ›
An individual employee's local Earned Income Tax (EIT) Rate is determined by comparing the employee's “Total Resident EIT Rate” (for the municipality in which the employee lives) to the “Work Location Non-Resident EIT Rate” (for the municipality in which the employee works).
Do employees pay local taxes? ›
Generally, an employer must register with a local jurisdiction where they are doing business and withhold taxes from any employees that are working there then remit the withheld wages to the jurisdiction via tax returns or license renewals.
