Do I need to file a nonresident return for an out-of-state employer?

It depends. What usually matters is:

• In what state are you a resident? and
• In what state did you earn the income?

Reciprocal states

If you live in one state and work in another, and the two states have a reciprocal agreement, you would only pay taxes for your resident state only. 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.

This rule addresses the question, “If the employer is located in state A, but the employee is working in (and a resident of) state B, is it because the employer needs it that way or because the employee wants it that way?”

Sometimes state A will say that if it is not for the employer's needs, but rather for the employee’s convenience, state A will tax the income even if the employee is a resident of, and works in, a different state.

These states include:

• Alabama
• Connecticut
• Delaware
• Nebraska
• New York
• Oregon
• Pennsylvania
• New Jersey

For these states, you might need to file a nonresident return for the state where the employer is located and pay state income taxes to that nonresident state. But even this has exceptions, because every state has its own tax laws.

When is a remote worker required to file and pay tax to a nonresident state because of the “convenience of the employer rule?"

• Employees who live in a state with no income tax will pay state tax to the nonresident state for that income.

• Employees who live in a state that does have state income tax will need to file a nonresident state tax return and a resident state return.
  Normally, the resident state applies a credit for the tax paid to the nonresident state for the shared income.

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, the taxpayer 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, instruct the payroll department to correct the state withholding. If the tax payments were going to the wrong state, you may incur a tax penalty 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 was not 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 does not 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