Do I need to file a nonresident return for an out-of-state employer?
If you need to file a nonresident return for an out-of-state employer, it depends on:
Reciprocal states
If you live in one state and work in another, and the two states have a reciprocal agreement, you’d only pay taxes for your resident state. You wouldn't need to file a nonresident return.
Remote workers
If you work as an employee but the employer who pays your wages is located in a different state, you may be considered a remote worker.
Usually, remote workers pay state income tax to their resident state and don't need to file a nonresident state return, but not always. Each state has different guidelines, so it's important to look at individual state rules to determine if you need to file for that state this year.
There are exceptions for states that use the “convenience of the employer” rule.
What’s the “convenience of the employer” rule?
The convenience of the employer rule applies to certain taxpayers who work from home. It means you're taxed as if you work in your employer's state even if you don't.
You may need to file both a resident and a nonresident return, unless you live in a reciprocal state or a state without income tax.
The convenience of the employer rule may apply to you if you live or work in:
Alabama
Delaware
Nebraska
New York
Pennsylvania
Additionally, Connecticut and New Jersey tax the income of nonresidents working from home only when that taxpayer’s home state applies a similar tax.
What factors would exempt me from the convenience of the employer rule?
Each state has its own guidelines, restrictions, and conditions regarding defining remote employees. To be exempt from the convenience of the employer rule and instead qualify as a remote, out-of-state employee, you'd need to be working away from your employer's location for their convenience rather than yours. This could happen for several reasons, including the employer needing employees that they can't attract in their home state or needing employees in multiple locations to serve clients around the country.
Other factors that might designate an employee as a remote worker for their employer's convenience include:
A home office is a requirement or condition of employment.
The employer doesn't provide the employee with an office or regular workspace.
The employer reimburses the employee for substantially all home office expenses.
The employee has a bona fide business purpose for working at home (for example, to meet multiple project deadlines in the home state).
The employee performs some core duties at home (for example, a stockbroker trades securities from home).
The employer or worker regularly meets or deals with clients, patients or customers at home.
What if state tax is withheld in error?
At times, employers withhold state taxes for the wrong state when the employee is subject to the reciprocal rule, the employee works remotely, or the payroll department makes a mistake. In these cases, you may need to file a nonresident return to get a refund of the state tax withheld in error. To do this, report earnings of $0 on the nonresident return.
Also, tell your payroll department to correct the state withholding. If the tax payments were going to the wrong state, you may get a fine from the state that wasn’t being paid properly throughout the year.
Filing state returns when working for an out-of-state employer
Example 1: Charlie drives to and works in Illinois, where the employer is located, but he is considered an Indiana resident. Charlie would file a nonresident Illinois return in addition to a resident Indiana return since the money was earned in Illinois.
If Charlie was a Wisconsin resident, drove to Illinois for work, and had properly submitted a state exemption form with Payroll because Wisconsin and Illinois have a reciprocal agreement, his employer would have only withheld Wisconsin tax and Charlie would file only a Wisconsin resident tax return.
If Charlie was a Wisconsin resident, drove to Illinois for work, but hadn't submitted a state exemption form with Payroll, his employer may have inadvertently withheld Illinois state tax.
In this case, because of the reciprocal agreement, Charlie would need to file a nonresident Illinois return to get the Illinois tax that was withheld refunded.
Next, Charlie would file a Wisconsin resident tax return. Since the Wisconsin state tax wasn't being withheld and paid properly throughout the year, Charlie may be subject to an underpayment penalty in addition to the Wisconsin state tax.
Example 2: Charlie is physically in Indiana, working remotely for an Illinois employer. Charlie would file a resident return for Indiana only since the money was earned in Indiana and Illinois doesn't apply the convenience of the employer rule.
Example 3: Charlie is physically in Indiana, working remotely for a Connecticut employer. Because of the convenience of the employer rule Connecticut uses, Charlie needs to file a nonresident Connecticut return and pay Connecticut income taxes. Charlie will also file a resident Indiana return for the same income and will receive a credit on his Indiana return for income taxed on both his Indiana and Connecticut tax returns.
