What You Need to Know about Income Taxes for Remote and Hybrid Workers

by Loreene Kemperman, IRIS Payroll Compliance Expert and Chair of NACTP Payroll and Information Reporting Committee

Calculating Income tax used to be straightforward because most employees lived and worked in the same city and state. But with more people working remotely or in hybrid roles, it’s more common for employees to live in one state or city and work in another.

Here’s a quick guide to some of the laws around income taxes for hybrid and remote workers.

How Does Remote and Hybrid Work Affect Taxes?

When managing payroll for remote or hybrid workers, state income taxes can become tricky. Typically, employees pay income tax in the state where they live and work, but for remote and hybrid work schedules, these locations may differ. 

If an employee lives in one state but works in another, they may have to file income tax returns in both states. Depending on the complexity of the remote or hybrid work schedule, employees may have to do additional calculations to ensure their tax returns are proportionate to the time worked in each state. For example, if an employee works from home in New Hampshire but commutes to the office in Massachusetts once a week the hours of work and income earned in each state needs to be tracked.

Can Remote Workers Be Double Taxed?

In most cases, employees can’t be double taxed. Income tax is calculated in both states, but each state offers a credit for taxes paid to another state. The state that has a higher tax rate takes priority.

For example, if a worker lives in Alabama but their employer is in Mississippi, their income tax is calculated in both states. However, since Mississippi has a higher tax rate, the employee pays Mississippi's rate, and Alabama gets a credit. This ensures the employee isn’t taxed twice.

There are five states in which a remote worker may be double taxed: Connecticut, Delaware, Nebraska, New York, and Pennsylvania. If the employer is located in one of these states, a remote employee can be taxed by that state, even if they have never performed any work there.

Example: a remote employee may live and work in North Dakota for a company based in New York. That employee would pay taxes to North Dakota, but additionally, the state of New York expects taxes to be paid for the income earned through the New York based employer. The employee has to pay income taxes to both states.

What Happens If Work is Done in Different Cities?

Tax complexity isn’t limited to state boundaries; working in different cities can also cause complications.

• Example 1: If an employee works some days in St. Louis, MO, the city applies local withholding taxes only for those specific days.
• Example 2: Similarly, in Ohio, income is taxed based on the city where the work was physically performed.  So, a hybrid employee who works 2 days/week at an office in Dayton and 3 days/week from home in Eaton would pay tax in Dayton and in Eaton for the amount of time worked at each location.

State Reciprocity Agreements Can Help

Many neighboring states have agreements, called state reciprocity agreements, to simplify taxes for cross-border workers. These agreements ensure taxes are only paid in the employee’s state of residence. They are most common in Midwest states like Kentucky and Michigan. For payroll service businesses, knowing the rules for each state—and exceptions like reciprocity agreements or special taxation policies—is crucial to ensure compliance and fairness for employers and employees alike.

The Convenience of the Employer Test

One unique challenge payroll service providers often encounter is the Convenience of the Employer Test, which is applied in Connecticut, Delaware, Nebraska, New Jersey, New York, and Pennsylvania. Here’s how it works:

• If an employee works from home in another state for the convenience of the employer (e.g., because the company asked them to), those days are generally not taxed by the employer’s state.
• However, if the employee works from home in another state for their own convenience (e.g., for personal reasons), those days will be taxed by the employer’s state.

Simplifying Payroll for Multi-State Taxation

Managing tax compliance for remote and hybrid workers can be a major challenge for payroll teams. They must track hours worked across states, calculate tax credits, and follow state-specific rules.

IRIS Payroll can automate even the most complex hybrid work environments, and automatically stays up to date with all federal, state, and local legislations.

Contact us to find out how IRIS Payroll Solution can ease remote and hybrid payroll management.

Join us and IPPA for a webinar on April 17: “The Impact of Flexible Work Models on Payroll” for practical insights and actionable strategies to help you and your clients confidently navigate payroll in this new era of work.