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State taxesAugust 16, 20267 min read

Living in One State, Working in Another: How Not to Pay Twice

Two state returns instead of one, the credit for taxes paid to another state, and why with remote work the deciding factor is not your address but the rules of your employer's state.

Living in One State, Working in Another: How Not to Pay Twice

It is a common setup: you live in New Jersey and work in New York. Or you live in Michigan and the company is in Illinois. Both states are looking at the very same income. There should be no double tax here — but only if you file correctly.

The basic rule

Two principles work together:

Your state of residence taxes all of your income, wherever it was earned.

The source state taxes income earned within its borders — even if you do not live there.

The conflict is resolved by the credit for taxes paid to another state. Your resident state is the one that grants it: you show how much you paid the source state, and you reduce your tax at home by that amount.

What this looks like in practice

The sequence is always the same:

First comes the nonresident return in the state where the income was earned. It calculates tax on the portion of income that belongs to that state.

Then comes the resident return in your state of residence — that one reports all of your income.

On the resident return you claim the credit for the amount of tax paid to the other state.

The order matters: there is nowhere to take the credit amount from until the nonresident return has been calculated.

The credit does not always cover everything

This is where the unpleasant surprises show up. The credit is limited to the lesser of two amounts: what you actually paid the other state, and what your own state would have charged on that same income at its own rates.

If you live in a low-rate state and work in a high-rate state, nobody refunds you the difference. The reverse happens too: you pay a little in the source state and then top it up at home to your own state's rate.

Other common limits:

states take different positions on local taxes, and this is worth checking separately. New York does give a credit for another state's local taxes — Form IT-112-R speaks directly about tax paid to a local government in another state. New Jersey gives it too: a NJ resident working in Philadelphia may claim a credit for the city wage tax. California (Schedule S) and Ohio, on the other hand, do not give a credit for city taxes. And one more thing to keep in mind: New York City's own city tax is not reduced by the credit — IT-112-R works only against state tax;

some states will not give a credit on income they consider to be sourced within their own borders;

where a reciprocal agreement exists, the credit is not needed at all — that situation uses a different mechanism (there is a separate article on it).

Remote work: whose income is it

The most disputed area of all. The general rule is that income arises where the work is physically performed. You sit at home in New Jersey working for a New York company — by that general logic, this is New Jersey income.

But several states apply the "convenience of the employer" rule: if an employee works from another state for their own convenience, rather than out of necessity for the employer, the income is still treated as income of the employer's state.

Who applies it in 2026:

in full — New York, Delaware, Pennsylvania and Alabama;

Nebraska — with a caveat: the rule applies only if the nonresident worked in Nebraska more than seven days during the year. Someone who was never physically in the state is not covered by it;

Connecticut and New Jersey — on a mirror-response basis: they apply the rule only to residents of the states that apply it themselves;

Oregon — on a limited basis, to nonresidents in managerial positions.

Who does NOT apply it, contrary to what is often written: Arkansas repealed its version of the rule back in 2021 — work is now treated as performed in Arkansas only when the person is physically there. Massachusetts used a similar approach temporarily, during COVID, and does not use it now.

A separate note for New Jersey residents working for New York companies: the reimbursement program under which New Jersey refunded half of the additional tax to those who successfully challenged New York taxation applied only to tax years 2020–2023. For 2026 it no longer exists.

The practical takeaway: if you work remotely for a company in another state, check this list first. The answer determines where you pay — and whether you may end up paying in both places with an incomplete credit.

What your employer has to do

The employer withholds tax for whichever state it considers your work state. If you have moved or switched to remote work and HR does not know about it, the wrong state's tax will be withheld all year long. The money can be recovered, but only through a return and with a year's delay.

So:

report a move right away and file a new Form W-4 along with its state equivalent;

check the state shown on your W-2 in January, not in April;

if tax is being withheld for a state where you did not work a single day, you will need a nonresident return with zero income in order to get it back.

Typical combinations

NY / NJ. You live in New Jersey and work in New York: Form IT-203 for New York first, then NJ-1040 with the credit. There is no reciprocal agreement between these two states.

PA / NJ. Here there is an agreement: a Pennsylvania resident working in New Jersey pays no New Jersey tax on wages.

MI and its neighbors. Michigan has agreements with Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin.

Working in several states during the year. If you travel between job sites or work rotating shifts, income is split by the days worked in each state. Keep a record of those days — reconstructing it later is impossible.

Checklist

Determine which state is your "home" state — by domicile and by days.

Find out whether the two states have a reciprocal agreement.

Check whether your employer's state applies the convenience of the employer rule.

Calculate the returns in the right order: nonresident first, resident second.

Check that your employer is not withholding for the wrong state.

Keep a record of workdays by state if there is more than one.

Sources

Credit rules and forms — the return instructions on the state agency websites, for example tax.ny.gov, nj.gov/treasury/taxation, michigan.gov/taxes, tax.illinois.gov. An overview of how states approach the taxation of nonresidents and remote employees — Tax Foundation.

Two state returns are exactly the case where a mistake in the order of calculation costs real money. Book a consultation if you work in a state other than the one you live in.