Navigating State Income Tax Withholding in the Era of Mobile Workforces

The rise of mobile and remote workforces has fundamentally changed the landscape of employment tax compliance in the United States. Employers must now navigate a complex web of state tax rules that govern income tax withholding and reporting obligations for employees who work outside traditional office settings, often across multiple jurisdictions. This challenge is particularly important for employers with employees commuting across state lines, working remotely, or traveling frequently to multiple states.

Ohio-based businesses face a unique circumstance where they need to administer employment tax at the local level in addition to the state level. The same concepts that apply to multi-state compliance translate to the employer’s responsibility to withhold tax for employees located in municipal taxing jurisdictions throughout the state.

General Rule

Most states mandate that employers deduct and withhold state income tax on wages paid to employees in the state where the services are performed. Regardless of the employer’s location, the obligation to withhold is typically triggered by the employee providing services within a given state. This can become cumbersome when an employee travels to multiple states due to the lack of uniformity across state requirements.

Each state has different rules for when withholding is required, with different parameters in place that dictate when and where to withhold employment tax.

Filing and Withholding Thresholds

This is an important consideration for business travel by employees. The thresholds at which nonresident employees and their employers are liable for state income tax and withholding vary greatly among states. While some states establish thresholds based on days worked or revenue earned, others demand withholding from the first day or dollar earned in the state.

Indiana and Montana, for instance, have implemented a >30-day threshold, which exempts businesses from withholding state income tax until an employee has worked in the state for more than 30 days (3)(4).

Georgia, on the other hand, has either a 23-day threshold or a wage threshold based upon a percentage or dollar amount of $5,000. Georgia requires employers to withhold state income tax if a nonresident employee earns more than $5,000 or more than 5% of their total wages from work performed in Georgia during the year, whichever is less (5).

Reciprocity Agreements

A tax reciprocity agreement is a pact between two or more states not to tax the income of workers who commute into the state from another state covered by the agreement. Absent a reciprocity agreement, the employer may have a secondary withholding requirement for the employee’s resident state.

Ohio has a reciprocity agreement with five states: Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia. Under typical circumstances, an employer withholds state income tax in the state where the services are performed. That is not the case for Ohio and its reciprocity states.

Example: An individual lives in Covington, Kentucky, but travels across state lines into Cincinnati for work. The employer would withhold only Kentucky income taxes for that employee because they are exempt from Ohio income taxes due to the reciprocity agreement (6)(7)(8).

“Convenience of Employer” Rule

A handful of states apply a “convenience of the employer” rule, taxing nonresidents on income earned while working remotely outside the state if the remote work is for the employee’s convenience rather than the employer’s necessity. This can result in double taxation if the employee’s state of residence also taxes the income. Employers must be vigilant in tracking the application of these rules and may need to withhold in multiple states.

States that apply convenience of employer rules include Alabama, Delaware, Nebraska, New York, and others.

Tracking Traveling Employees

Employers can track the work location of remote employees using several practical methods: key fobs, time entry systems, timecards, travel reimbursement reports, software tracking, and GPS. The common approach is to require employees to submit daily or weekly timesheets specifying their work location for each day. Some companies may also request employees to self-certify their work location periodically. These tools will help ease the burden on companies to accurately track the proper work location of their employees.

Future Possibilities for Uniformity

“The Mobile Workforce State Income Tax Simplification Act” – U.S. Senators John Thune (South Dakota) and Catherine Cortez Masto (Nevada) have introduced legislation to the US Senate to push towards uniformity between states. “Under this pending federal legislation, the state income taxation of wages or other remuneration of any employee who performs employment duties in more than one state is limited to:

• The state of the employee’s residence; and

• The state within which the employee is “present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration are earned” (2).

Partnering for Success

Given the complexity and variability of state income tax withholding requirements, employers with multi-state operations or unique employment arrangements should not rely solely on third-party payroll providers for compliance. Instead, they should seek guidance from qualified tax professionals, such as BMF, who can provide tailored advice and ensure compliance with each jurisdiction’s unique requirements. This approach minimizes the risk of under- or over-withholding, penalties, and administrative errors, and ensures that all relevant state-specific rules and exceptions are properly addressed.

References

1. Tax Foundation. “Tax Reciprocity Agreement.” Available at: taxfoundation.org/taxedu/glossary/tax-reciprocity-agreement/

2. Deloitte. “Mobile Workforce State Income Tax Simplification Act.” Tax Newsletter, April 18, 2025. Available at: dhub.deloitte.com/Newsletters/Tax/2025/STM/250418_2.html

3. Montana Code Annotated, Title 15, Chapter 30, Part 21, Section 60. Available at: archive.legmt.gov/bills/mca/title_0150/chapter_0300/part_0210/section_0060/0150-0300-0210-0060.html

4. Indiana Department of Revenue. “Information Bulletin #33.” Available at: in.gov/dor/resources/tax-library/information-bulletins/#tab-133299-2-List_of_Income_Tax_Information_Bulletins

5. Official Code of Georgia Annotated § 48-7-1. Available at: fultoncountyga.gov/commissioners/clerk-to-the-commission/code-of-georgia

6. Ohio Revised Code Section 5747.05. Available at: codes.ohio.gov/ohio-revised-code/section-5747.05

7. Ohio Revised Code Section 5747.06. Available at: codes.ohio.gov/ohio-revised-code/section-5747.06

8. Ohio Department of Taxation. “Employer Withholding Reciprocity FAQs.” Available at: tax.ohio.gov/help-center/faqs/employer-withholding-reciprocity