Which state gets withholding and unemployment insurance when an employee works in more than one state?

Withholding follows the work, and the residence state takes the second layer

The starting rule for an employer is that wages are taxed, and withheld on, where the employee performs the services. California's Employment Development Department states the nonresident side directly: "Only the wages earned in California are subject to PIT withholding" (EDD Information Sheet DE 231D, Rev. 13 (2-22)). The California source rule behind it allocates a nonresident's pay for intermittent work by working days in California over total working days (Cal. Code Regs., tit. 18, section 17951-5(b)). New York's withholding statute reaches "every employer maintaining an office or transacting business within this state and making payment of any wages taxable under this article" (N.Y. Tax Law section 671(a)(1)), and a nonresident employee who works partly in New York gives the employer Form IT-2104.1, which estimates the New York share of services by days, miles or time; the employer keeps the certificate available for the Department of Taxation and Finance, and the employee must report a change in residence or in the percentage within 10 days (Form IT-2104.1 (12/24), instructions).

Work states set their own triggers. Illinois requires withholding from a nonresident employee who is expected to "perform non-incidental services for more than 30 working days within Illinois" during the calendar year (Illinois Department of Revenue, Publication 130, Form IL-W-6). Thresholds differ by state, and where a state has none, a single working day can create a withholding obligation. Reciprocal agreements change the answer for listed states only: Illinois does not withhold its tax from an employee who is a resident of Iowa, Kentucky, Michigan or Wisconsin and files Form IL-W-5-NR (Publication 130). Each agreement is limited to the states that made it, and an employee who also works in a third state is withheld on there under that state's ordinary rules.

The residence state then applies its own rule, and California's shows the usual shape. California treats wages paid to a resident "for services performed within or without this state" as subject to California withholding; where the services are also subject to another state's withholding, the employer makes the other state's withholding first and withholds for California only the amount by which California's exceeds it, and nothing if the other state's amount is equal or greater (DE 231D; California Employer's Guide 2026, DE 44 Rev. 52 (4-26), page 18). The two layers together mean a resident working temporarily in another state is withheld on by both states, with the residence state's withholding reduced so that the combined amount follows the higher of the two; the employee's own returns settle the final tax.

Example. A professional services firm with offices in California and New York sends a California-based employee, a California resident, to Illinois for three weeks (15 working days). Illinois's more-than-30-day rule is not met, so the firm withholds no Illinois tax, and California withholds on the full wage under its resident rule. If the assignment is expected to run past 30 working days in Illinois, Illinois withholding applies and California's withholding on those wages drops to the excess of the California amount over the Illinois amount.

New York's convenience rule, in one paragraph

New York adds a sourcing rule that changes the withholding map for remote work. A nonresident's allowance for days worked outside New York "must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer" (20 NYCRR 132.18(a)). A nonresident assigned to a New York office who works from home in another state by choice therefore has those home days counted as New York days, and the employer's Form IT-2104.1 percentage should reflect that. The library's articles on the convenience of the employer rule and on New York's workday allocation cover the bona fide employer office test, the pandemic cases and the reciprocal rules of other states.

Unemployment insurance: one state, chosen by a four-step test

Unemployment insurance is not apportioned among the states where an employee works. The state statutes adopt a common definition under which an individual's entire service, inside and outside the state, is employment in one state. California's version reads in four steps (Cal. Unemp. Ins. Code sections 602 and 603):

1. Localization. The service is localized in California if it is performed entirely in California, or if the service outside California is incidental to the service inside, such as work that is temporary or transitory or consists of isolated transactions (section 603).
2. Base of operations. If the service is not localized in any state but some of it is performed in California, it is California employment if the base of operations is in California (section 602(b)(1)).
3. Direction or control. If there is no base of operations, the place from which the service is directed or controlled decides (section 602(b)(1)).
4. Residence. If neither the base of operations nor the place of direction or control is in a state where some of the service is performed, the service is California employment if the individual resides in California (section 602(b)(2)).

Steps 2 to 4 each apply only where some of the service is performed in California (section 602(b)).

New York's statute follows the same order. Service is localized in New York if it is performed entirely in New York or the service outside is "incidental to the person's service within the state," for example work "temporary or transitory in nature" or that "consists of isolated transactions" (N.Y. Labor Law section 511(2)); service not localized in any state is New York employment if the base of operations, then the place of direction or control, then the residence is in New York, each step reached only when the one before it fails (section 511(3)). The employer guide the Department of Labor and the Department of Taxation and Finance issue together describes the same tests (Publication NYS-50 (12/25)).

The order is the whole of the rule. Residence is the last step, not a default, and an employer that reports unemployment wages to the state where an employee lives without first asking where the service is localized is reporting to the wrong state whenever the employee works somewhere else. The EDD's information sheet describes the base of operations as a fairly permanent place from which the employee starts work and to which the employee customarily returns for instructions or supplies, and residence as a more or less permanent place of abode (DE 231D).

Example. The same firm's New York manager, a New Jersey resident, spends her year at client sites in four states, never more than a few weeks in any one, and returns between assignments to the New York office, where her travel is planned and her equipment is kept. No state localizes her service: no single state has all of it, and the travel is not incidental to work in any one place. The base of operations step decides, and the New York office makes her service New York employment. The California employee on a three-week Illinois assignment is a localization case: the Illinois work is temporary and incidental, and California covers all of his wages.

A narrow election sits beside the test. California's information sheet describes an Interstate Reciprocal Coverage Arrangement under which an employer may, with written approval, report all of a multistate employee's wages to one state where the employee performs services, lives, or where the employer has a place of business, and Form DE 2325 for electing California coverage of a multistate worker (DE 231D). The election is a filing choice made in advance, not a correction made after the year.

Moving mid-year: the wage base, and the credit for wages reported elsewhere

An employee who moves and keeps working for the same employer changes the unemployment answer the day the service becomes localized in the new state. The taxable wage base runs per employer and per state, so the new state's contribution starts at zero unless its statute counts the wages already reported to the old one. California's does: in deciding whether the $7,000 limit of section 930 has been reached, "the remuneration shall be deemed to include any remuneration paid to the individual by the employer for services constituting employment under the unemployment compensation law of another state which the employer has reported to the other state as wages for contribution purposes" (Cal. Unemp. Ins. Code section 930.1; DE 44 (2026), page ii, $7,000 for 2026). New York's wage base provision reaches the same result by defining employment, for the cap, to include "services constituting employment under any unemployment compensation law of another state or the United States" (N.Y. Labor Law section 518(1)(a)).

The credit is statutory, so it exists only where the new state's law provides it, it runs only for the same employer in the same calendar year, and in California it reaches only wages the employer reported to the other state as contribution wages. An employer that never reported the old state's wages, or reported them to the wrong state, cannot use them to fill the new state's base.

Example. The firm transfers a New York office employee, a New York resident earning $120,000, to its California office on July 1; she moves to California and works there from that date. By June 30 the firm has paid her $60,000 and reported those wages to New York. From July 1 her service is localized in California. Under section 930.1 the $60,000 reported to New York counts toward California's $7,000 limit, which is already exceeded, so the firm owes no California unemployment insurance contributions on her for the rest of the year. Without that credit it would owe contributions on her first $7,000 of California wages. On the withholding side, New York withholds as for a resident through June 30, and California withholds as for a resident from July 1, since her California wages are now both resident wages and California-source wages. The firm registers or updates its California account for her before the first July payroll, and her new Form DE 4 replaces the New York certificate.

Air, rail and motor carrier crews

Federal law limits which states may tax the pay of certain interstate crews, and the limits govern withholding because a state without power to tax the pay has nothing to withhold. "The pay of an employee of an air carrier having regularly assigned duties on aircraft in at least 2 States" is "subject to the income tax laws of only" the employee's state of residence and the state in which the employee earns more than 50 percent of the pay received from the carrier, measured by scheduled flight time in that state against total scheduled flight time for the calendar year (49 U.S.C. section 40116(f)(1), (2)). The rail statute protects an employee who performs "regularly assigned duties as such an employee on a railroad" in more than one state, taxable only by the state of residence (49 U.S.C. section 11502(a)). The motor carrier statute protects an employee of a motor carrier or motor private carrier who performs "regularly assigned duties in 2 or more States" with respect to a motor vehicle, again taxable only by the state of residence (49 U.S.C. section 14503(a)). Seamen's wages have their own statute, which the library's article on vessel crews covers (46 U.S.C. section 11108). Each statute speaks to income tax only. Unemployment insurance for these crews has rules of its own: rail employees are covered by the federal Railroad Unemployment Insurance Act, not state law (45 U.S.C. section 363(b)), and California covers American vessel and aircraft crews whose operations are directed from a California operating office (Cal. Unemp. Ins. Code section 609).

Whether section 40116(f) reaches a given pilot turns on whether the employer is an air carrier, and the statute's own definitions answer that. Section 40116(f) does not define the term; the definitions section of the same part of Title 49 does. An air carrier is "a citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation" (49 U.S.C. section 40102(a)(2)). Air transportation means "foreign air transportation, interstate air transportation, or the transportation of mail by aircraft" (section 40102(a)(5)), and interstate and foreign air transportation each mean "the transportation of passengers or property by aircraft as a common carrier for compensation" between the places the definitions list (section 40102(a)(23), (25)).

Example. A pilot flies in several states. Suppose first that the employer is an on-demand charter operator that sells flights to the public for compensation. That operator undertakes to provide interstate air transportation as a common carrier, which makes it an air carrier, and the pilot's pay is taxable only by the pilot's state of residence and by any state where more than half of the pilot's scheduled flight time falls. Suppose instead that the employer manages aircraft for private owners and flies each owner's aircraft for that owner alone. If that employer does not hold out carriage to the public for compensation, it does not undertake common carriage, it is not an air carrier under the definition, and section 40116(f) does not protect the pilot; each state where the pilot works applies its ordinary rules and thresholds. Where a company also sells charter flights, whether it holds out carriage to the public is a question of fact; if it does, it is an air carrier, and the statute then asks only whether the employee has regularly assigned duties on aircraft in at least two states (49 U.S.C. section 40116(f)(2)).

The employer's side: registration, presence and the record

Each answer above has an employer consequence. A withholding obligation in a new state means registration with that state's revenue agency, and coverage under a state's unemployment law means an employer account there; California's DE 2325 election and the reciprocal coverage arrangement are both made through those accounts. An employee who works in a state, whether on assignment or from a home office, is also the employer's physical presence in that state for the state's own income tax nexus analysis, a separate question the library treats in its nexus articles.

The documentation that supports the answers is the same for both rules. For each employee it records the assigned office, the residence, the work-location code used in payroll, the days worked by state, the certificate on file for each state (Form DE 4, Form IT-2104.1, Form IL-W-5-NR and the like) and its date, and, for anyone not localized in a single state, a short note of the base of operations or the place of direction or control and why. Day counts kept as the year runs answer Form IT-2104.1, Illinois's 30-day test and the California working-day allocation from one source; day counts rebuilt at year end from expense reports answer them less well.

Practice notes

The sound sequence for any employee who works away from the assigned office is to answer the unemployment question first, because it yields one state, and the withholding question second, because it can yield several. The unemployment answer comes from the four steps in order, with residence reached only when the first three fail. The withholding answer comes from each work state's threshold and any reciprocal agreement, then the residence state's rule and its reduction for the work state's tax. A mid-year transfer is handled on the day of the move, not at year end: the new unemployment account, the wage base credit where the new state's statute grants one, and the new withholding certificate. For pilots and drivers, the employer's own status under the federal definitions comes before any state rule. G&G State Tax Group provides multistate payroll situs reviews for employers with traveling, remote and relocating employees alongside its state and local tax practice.