Multi-State Payroll Taxation

9/21/2025

Employees who live in one state but work in another can create withholding problems and questions for the Payroll Department.

In general, if an employee lives and works in two different states, the employer must withhold taxes for the state where the services are performed.

However, while an employer generally has to follow this rule, it also has to consider the withholding requirements of the state of residence which may impose additional withholding requirements and responsibilities.

This is only true if the employer has a presence in that state. Employers are not required to deduct taxes for states in which they have no employees working or present.

The following are some general withholding guidelines:

Withholding For Residents Working Outside The State
Most states have a general rule that require an employer withhold taxation on residents working outside of their home state. It is also true that many states have what are known as reciprocal agreements to assist in this area and to help avoid double taxation. Payroll departments have to consult with both the employee's resident state and work state to see what the reciprocal agreements may be.
Nonresidents
Employees who reside in one state and work in another are normally subject to the withholding rules of the state where the work is performed. However, if the employee works in more than one state, allocation of taxes may be required.

The definition of resident and nonresident is usually contained in the state's tax code.

Administrative Tip:
The best and easiest way to determine which state requires withholding and how is to do a simple "T" account. On the left put the resident state or where the employee lives. On the right put the state where the employee works or nonresident state. Put the requirements for both in and then compare. Also list any reciprocal agreements.

Do not presume because states are not located next to each other that reciprocal agreements do not exist. Also, do not presume that if one state has a reciprocal agreement with another that they go both ways.

Example: Delaware has a reciprocal agreement with Maryland for its residents but Maryland does not have one with Delaware for its residents. In this case, the payroll professional must look up both state’s requirements.

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