Income Tax Withholding for Remote Employees

More companies are outsourcing their work by bringing on remote employees who are capable of working nearly anywhere. Although having a remote workforce offers hordes of benefits, keeping track of remote employees where payroll is concerned can be a little confusing when it comes to income tax withholding and employee reporting. One of the most common concerns among small business owners is income tax withholding for remote employees. 

The general rule regarding state income tax withholding is that employers should withhold income taxes according to where the work was performed. So if a remote worker lives and works entirely in South Dakota despite the fact that his employer is located in New York, the worker’s income taxes that are withheld should be according to South Dakota law and will be paid to South Dakota State.

But what if an employee works in multiple states? This is where things can get a little trickier. Taxes must be withheld and paid for in each of the states that the employee worked in, plus these two additional factors must be added in that may further complicate withholding.  

The first factor does not affect remote workers but still should be addressed. This one concerns employees who work on site but live in other states.  This issue often comes up for businesses that are located near the border of another state and workers must cross the border from the state in which they reside to the state in which they work. 

The other side of the coin is when an employee lives in the same state as an employer but works entirely across the border in a different state. Because the state the worker lives in is the same as the employer, income taxes must be withheld and paid in the state in which they both live. There may also be additional withholding in the state the employee actually works.