How do I handle withholding when I live in one state but my employer is in another?

Question

AcadiFi · Accepted Answer

Start with two separate ideas: residency and sourcing. A resident state usually taxes all income of its residents, while another state may also tax wages sourced there under its own rules. If both states tax the same wages, the resident state often allows a credit for tax paid to the other state, but the mechanics depend on each state's law.

Suppose Harbor Lane Advisors has an employee who lives in Pennsylvania and earns $96,000. The employer is based in New York, and the employee works remotely most days but travels into New York monthly. If New York's sourcing rules treat the wages as New York-source income, New York withholding may still apply. Pennsylvania may also tax the wages because the employee is a resident. The employee may then claim a resident credit on the Pennsylvania return for tax paid to New York, reducing double taxation rather than eliminating filing obligations.

The EA takeaway is that a withholding mismatch does not automatically mean the payroll department is wrong. First determine residency. Then determine where the wages are sourced. Then check whether a resident credit is available. Working through those three steps is much better than assuming the state listed on the paycheck tells the whole story. Practice more in our EA question bank.

How do I handle withholding when I live in one state but my employer is in another?

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