If You Work Remotely Where Do You Pay Taxes

The Short Answer: It’s About Where Your Feet Are

Here is the simple truth right off the bat: In the vast majority of cases, you pay taxes to the state where you are physically sitting when you do the work.

It usually doesn't matter if your company is based in San Francisco, New York, or a server farm in the middle of nowhere. If you are sitting at your kitchen table in Austin, Texas, whilst typing on your laptop, you are subject to Texas laws (which luckily has no state income tax) and federal US laws.

However, taxes are never quite that simple are they? While the "physical presence" rule is the main standard, there are about five different ways this can get messy depending on if you are a W-2 employee, a freelancer, moving between states, or going international. Let’s break it down so you don't get a scary letter from the IRS.

Scenario 1: You Live in One State but Your Company is in Another

This is the most common remote work setup. You got hired by a tech startup in California, but you live in Colorado.

Generally, you will pay:

• Federal Income Tax (to the IRS).
• State Income Tax to Colorado (your home state).

You typically do not pay California taxes just because the company is there. Your employer should register for payroll in Colorado and withhold Colorado taxes from your paycheck.

The Exception: Reciprocity Agreements

If you live in a state that borders the state where you work (or used to commute to), there might be a "reciprocity agreement." For example, if you live in New Jersey but your office is in Pennsylvania. These states have a deal to play nice so you don't have to file two returns. You generally just file in your home state.

Scenario 2: The "Convenience of the Employer" Rule (The Scary Part)

Okay, you need to pay attention to this part because it catches a lot of people off guard. There are a handful of states-most notably New York, Delaware, Nebraska, and Pennsylvania-that use something called the "Convenience of the Employer" rule.

Here is how it works. Let's say your company is based in New York City. You decided to move to Vermont because you like the mountains and working from home. You chose to move; your boss didn't force you to.

According to New York, because you are working remotely for your own convenience (and not because the company needs you in Vermont), New York still wants to tax your income.

So, you could end up in a situation where:

1. New York taxes your income because the job is "based" there.
2. Vermont taxes your income because you live there.

Usually, your home state (Vermont in this case) will give you a tax credit for taxes paid to another state so you aren't double-taxed. But if New York's rate is higher than Vermont's, you end up paying the higher rate. It’s a pain. If you work for a company in NY or PA, definitely check with a CPA.

Scenario 3: The Digital Nomad Hopping Between States

Maybe you don't have a permanent home. You bought a van, or you're just jumping between Airbnbs every month. Who gets your tax money?

This comes down to two legal concepts: Domicile and Residency.

Domicile vs. Residency

Residency is where you are sleeping right now. Domicile is your true, permanent home-the place you intend to return to.

You can have many residences, but only one domicile. If you leave your apartment in California to travel the US for a year, but you keep your CA driver’s license, your bank accounts are in CA, and you plan to go back eventually... California still considers you domiciled there. They will want to tax 100% of your income, even the money you earned while sitting in a coffee shop in Florida.

The 183-Day Rule

Most states have a "statutory residency" rule. If you spend more than half the year (usually 183 days) in a state, they consider you a resident for tax purposes.

So, if you keep your domicile in California but spend 7 months in Arizona, you might technically owe taxes to both. Arizona claims you because you were there so long, and California claims you because it's your permanent home. Again, tax credits usually prevent total double taxation, but the paperwork is a nightmare.

The Fix: If you are going full nomad, you usually want to establish a new domicile in a tax-friendly state (like Texas, Florida, or South Dakota) before you leave. This involves getting a driver’s license there, registering your car, and registering to vote. You can't just pick a state you've never been to; you usually have to physically go there to set this up.

Scenario 4: Working Internationally (US Citizens)

So you want to take the laptop to Bali or Lisbon? I don't blame you. But the US is unique-and not in a good way here.

According to the US Department of State and the IRS, the United States uses Citizenship-Based Taxation. Almost every other country on earth uses residence-based taxation. This means that as long as you hold a US passport, the IRS wants to know about your income, even if you haven't stepped foot in America for 20 years.

The Foreign Earned Income Exclusion (FEIE)

There is some good news though. The IRS has a provision called the Foreign Earned Income Exclusion (Form 2555).

If you meet strict requirements (usually being out of the US for 330 full days in a 12-month period), you can exclude the first roughly $120,000 (this number adjusts for inflation yearly) of your income from US federal income tax.

But watch out:

• You still have to pay Social Security and Medicare taxes (FICA) if you are employed by a US company.
• You still have to file a return to claim the exclusion. It’s not automatic.
• State taxes are tricky. States like California might not recognize the FEIE and will still tax you if you haven't properly "broken up" with the state (severed your domicile).

Paying Taxes to the Foreign Country

Just because you are paying (or filing) with the US doesn't mean the country you are visiting doesn't want money too.

If you stay in a country longer than 183 days (the standard international rule), you usually become a tax resident there. If you are working in the UK for 8 months, the UK wants tax on your income.

Ideally, you want to avoid being a tax resident in two countries at once. This is where "Digital Nomad Visas" come in handy-some of them offer a grace period where you don't owe local taxes for a year. Always check the specific visa rules.

W-2 Employees vs. Contractors (1099)

How you are paid changes the logistics of this significantly.

If You Are W-2 (Employee)

Your employer handles the tax withholding. This is why you must tell HR where you are.

If you move from Texas to Oregon and don't tell your boss, they will keep withholding 0% for state tax (Texas rules). But you actually owe nearly 9% to Oregon. Come April, you are going to have a massive tax bill and probably penalties for underpayment.

Furthermore, your company might not be registered to do business in Oregon. By working there, you create a "nexus" for them, meaning they might suddenly owe Oregon corporate taxes because they have an employee (you) on the ground. Companies get very mad when you do this without asking.

If You Are 1099 (Freelancer/Contractor)

You are the boss. The company you contract for doesn't care where you are; they just send you the gross money.

It is 100% your responsibility to:

• Set aside money for taxes (aim for 30%).
• Make quarterly estimated tax payments to the IRS and your state.
• Figure out which state you owe based on where you are living.

How to Protect Yourself

Look, nobody wants to deal with an audit. It’s stressful and expensive. Here is a simple checklist to keep your nose clean while working remotely.

1. Track Your Days
There are apps for this, or just use a spreadsheet. If you split time between states (like New York and Florida), you need proof of exactly how many days you spent in each. If NY audits you, they will look at cell phone records and credit card swipes. You need to prove you were in FL for more than half the year if you claim residency there.

2. Update Your Address Immediately
Don't be lazy about this. Change your address with your bank, your employer, and the post office. Having mail go to an old address looks suspicious to tax authorities.

3. Consult a Tax Pro for the "Move" Year
TurboTax is great for simple stuff, but if you moved states halfway through the year, or if you are working internationally, spend the few hundred bucks to talk to a CPA. The mistake of filing the wrong state return costs way more than the CPA's fee.

Frequently Asked Questions

Q: If I work from an Airbnb in a different state for just two weeks, do I owe taxes there?
Technically? In many states, yes. Some states have a "first dollar" rule, meaning if you earn $1 on their soil, they want a cut. Practically speaking? Most people don't file for a two-week trip, and states rarely enforce it for such short durations unless you are a professional athlete or entertainer. However, if you stay for a month or two, you are entering risky territory.

Q: My company is in California but I live in Texas. Do I pay CA taxes?
Generally, no. You pay federal tax, and since Texas has no state income tax, you pay zero state tax. California usually only taxes non-residents on income earned within California. If you never step foot in CA, you shouldn't owe them.

Q: Can I just use my parents' address in Florida to save on taxes?
If you don't actually live there? No. That is tax fraud. Residency audits are real. If you live in NYC but claim you live in Florida at your mom's house, New York can track your cell phone location, E-ZPass tolls, and credit card usage to prove you were actually in Brooklyn. It’s not worth the risk.

Q: What is a "Nexus"?
In simple terms, Nexus is a connection. If a company has a "Nexus" in a state, they have to pay taxes there and follow that state's labor laws. You, as a remote employee, create a Nexus for your employer just by sitting there working. This is why some companies have a list of "approved states" where they allow you to live.

Q: Does the 183-day rule apply to countries or just states?
It applies to both, generally. Most countries consider you a tax resident if you are there for more than half the year. However, tax treaties between the US and other countries can affect this, so it's always best to read up on the specific country you are visiting.