The Convenience-of-Employer Rule
A handful of states source a remote employee's income to the employer's location, on the theory that working elsewhere was the employee's convenience rather than the employer's necessity. The gap it creates is real double tax.
The rule in short
Ordinarily wages are sourced to the state where the work is physically performed. A small number of states apply a different rule for employees of in-state employers who work remotely: unless the remote location was a necessity of the employer rather than a convenience of the employee, the days are sourced to the employer's state.
The ordinary rule for wages is simple and intuitive: income is taxed by the state where the work was done. A small number of states apply an exception that inverts it for remote employees, and because remote work is now ordinary rather than exceptional, the exception reaches far more people than it once did.
The ordinary rule
Wages are sourced to the place of performance. The state where the employee physically was when the work was done has the primary claim.
Which produces day-by-day allocation. An employee splitting time between two states allocates wages between them on a working-day basis.
The resident state taxes everything. A resident is taxed on all income wherever earned, with credit for tax paid elsewhere.
The non-resident state taxes what is sourced there. Producing the non-resident filing obligations described in part-year and non-resident returns compared.
And the system generally balances. Because sourcing rules mostly agree, and the credit mechanism handles the overlap.
The exception
Remote days sourced to the employer. Where an employee of an in-state employer works from another state, the days are treated as worked at the employer's location.
Unless the location was a necessity of the employer. The test is whether the employer required the work to be performed there for its own reasons.
Employee preference is not enough. Living elsewhere, preferring to work from home, or being permitted to do so does not satisfy the test.
Applied by a small number of states. The rule is not general, and it matters intensely to employees of employers in the states that apply it.
And it produces tax on days never spent there. Which is the feature that makes the rule contentious.
| Arrangement | Sourced to | Reason |
|---|---|---|
| Employee prefers to work from home | The employer's state | Convenience of the employee |
| Employer has no office in that state | Usually the employer's state | Still not a necessity |
| A bona fide employer office at the location | The work location | Necessity satisfied |
| Role defined by serving that market | The work location | Necessity of the employer |
| Days actually at the employer's premises | The employer's state | Ordinary sourcing |
What satisfies necessity
A bona fide employer office at the location. The principal route, requiring a genuine office maintained and paid for by the employer.
Work that can only be done there. Servicing a client base, operating equipment, or a role defined by the location itself.
Assignment rather than accommodation. An employer directing an employee to establish in a market is different from an employer agreeing to an employee's request.
Documented in the employment terms. A contract stating the work location and the employer's reason for it is worth considerably more than an informal arrangement.
And tested factually. States apply detailed criteria to the office question, and a home workspace rarely satisfies them.
Where the home state considers the income earned within its own borders, it may allow no credit for the tax the employer's state has collected. Unlike most cross-border tax problems, the credit mechanism does not close the gap, which is why documenting employer necessity at the time the arrangement starts is worth real money.
The double tax problem
Two states claim the same income. The employer's state by this rule, and the employee's home state as a resident.
Credits are calculated on the home state's sourcing. If the home state considers the income earned within its own borders, it may not treat the other state's tax as creditable.
Which leaves a genuine gap. Unlike most cross-border tax situations, this one can produce tax paid twice on the same earnings.
The mechanics of relief are set out separately. In credit for tax paid to another state, which explains where credits stop working.
And reciprocal agreements do not usually help. Those arrangements, described in reciprocal agreements between neighboring states, address commuting rather than this rule.
What employees and employers can do
Establish where the employer is, first. The rule only applies to employees of employers located in the states that have it.
Document the reason for the remote arrangement. In the employment terms, at the time, in the employer's own language rather than the employee's.
Consider a genuine office. Where several employees are in one state, a real leased office may be cheaper than the tax consequence of not having one.
Track days properly. Because days actually spent at the employer's location are sourced there regardless, and the allocation depends on an accurate count.
And model the total cost before agreeing terms. A remote role across a state line can carry a tax outcome that materially changes the value of the compensation.
What makes this rule worth understanding out of proportion to the number of states applying it is the size of the populations affected. Employers concentrated in a small number of large states employ people who live across state lines in very large numbers, and remote arrangements that were exceptional a decade ago are now standard. A rule designed for a minority of telecommuters now reaches a substantial share of a professional workforce.
It is also a rule that surprises people at the worst point in the cycle. An employee who moved states, told their employer, had the arrangement approved and assumed the tax would follow their new address discovers otherwise when withholding continues to the employer's state, or when an assessment arrives. By then the year is over and the facts are fixed.
For employers, the exposure is administrative as well as financial. Withholding obligations, registration requirements and reporting all follow from where employees are treated as working, and getting the sourcing wrong creates liabilities that sit with the employer rather than the employee. Employers with distributed workforces increasingly maintain a state-by-state matrix for exactly this reason.
The advice that follows is unglamorous and effective: know which states apply the rule, know where the employer is treated as located, document why each remote arrangement exists in terms of the employer's requirements, and keep a day count. Those four things resolve most of the exposure, and none of them can be done retroactively.
A few specific situations deserve separate mention. An employee who relocates mid-year to a state where the employer has no presence is exposed for the remainder of the year and, in most cases, going forward; the relocation itself does not change the sourcing unless the employer's requirements change with it. An employee hired remotely from the outset is in a stronger position, particularly where the job description ties the role to the employee's own market. And an employee who divides time between a home office and the employer's premises has a straightforward allocation for the days actually spent at the office, with the rule affecting only the remainder.
Independent contractors sit outside the rule as it is usually framed, since it applies to wages. Business income is sourced under different provisions, generally by reference to where services are performed or where the market is. That distinction occasionally makes contractor status materially more favorable for a cross-border worker, though it is not a reason on its own to restructure a relationship that is in substance employment.
The broader point is that the rule survives because states with concentrated employer bases have a strong interest in it, and because the constitutional challenges brought against it have not so far dislodged it. Anyone hoping that remote work will eventually force its repeal is planning on an assumption rather than on the law as it stands, and the safer course is to treat the rule as durable and to arrange affairs accordingly.
Points to carry away
- Wages are ordinarily sourced to where the work is physically performed.
- A few states source remote days to the employer's location instead.
- The exception requires necessity of the employer, not preference of the employee.
- A bona fide employer office at the remote location is the usual route out.
- Credit relief from the home state is sometimes incomplete.
Questions readers ask
How is necessity distinguished from convenience?
By whether the employer required the work to be done at that location for its own reasons. An employee assigned to service clients in another state, or hired specifically to operate in a market where the employer has no office, is generally working there out of necessity. An employee who lives in another state and prefers to work from home is generally working there for their own convenience, however sensible the arrangement and however much the employer approves of it. Employer approval, a written remote-work policy and even a pandemic-era instruction are not automatically enough.
What is a bona fide employer office?
It is the principal route out of the rule in the states that apply it. Where the remote location qualifies as a genuine office of the employer, days worked there are sourced there in the ordinary way. The tests are detailed and factual: whether the employer maintains and pays for the space, whether it is held out to the public, whether other employees or clients use it, whether it contains employer-provided equipment and records. A spare bedroom with a company laptop does not usually qualify; a leased office the employer pays for generally does.
Does the home state give credit for the tax paid?
Usually, and not always in full. A resident's home state generally allows a credit for tax paid to another state on income sourced there, but the credit is calculated on the home state's view of sourcing. Where the home state considers the income earned within its own borders — because that is where the work was done — it may decline to treat the other state's tax as creditable at all. That mismatch is what produces genuine double taxation, and it is the reason this rule attracts more attention than its narrow application would suggest.
Sources
- Internal Revenue Service — State Government Websitesirs.gov
- Legal Information Institute — Taxationlaw.cornell.edu
- Legal Information Institute — Residencylaw.cornell.edu
- Legal Information Institute — Due Processlaw.cornell.edu
- Legal Information Institute — Commerce Clauselaw.cornell.edu
- U.S. Department of Labor — State Labor Officesdol.gov
Right Way Review is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
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