A hybrid employee working in two states usually has wages that both states can claim: the state where the office sits taxes the days worked there, and the home state taxes its resident. The employer's job is to withhold for the work state on office days, apply any reciprocity agreement or day threshold that removes that duty, and pick one state for unemployment insurance.
This guide covers how those rules fit together for a hybrid employee working in two states as of October 2026. It explains workday allocation, the nonresident day thresholds some states publish, reciprocity forms, the convenience-of-the-employer rule, state unemployment coverage, W-2 reporting and the federal home office position after the One Big Beautiful Bill Act. A worked example shows the arithmetic. For the wider set of state payroll rules, including minimum wages and SUI rates, see our multi-state payroll 101 guide.
A fully remote employee is the simpler case. They work from one home in one state, so the employer usually registers there and withholds for that state alone. The setup steps for that situation are in our guide on how to set up payroll and taxes for remote workers.
A hybrid employee splits the week. A common pattern is two or three office days in the employer's state and the remaining days at home across a state line. Each office day is work performed in the office state, and each home day is work performed in the home state. Payroll has to reflect both, unless a specific rule says otherwise.
The exposure also grows over time. An employee hired as fully in-office may move across a border and start commuting. Another may begin spending a month a year working from a family home in a third state. Without a reporting process, payroll keeps withholding as if nothing changed.
State income tax on wages follows two ideas that run in parallel.
The first is residence. A state generally taxes its residents on all of their income, wherever earned. The second is source. A state taxes nonresidents on income earned from work performed inside its borders. A hybrid employee who lives in one state and commutes to an office in another is a resident of the first and a nonresident earning source income in the second.
The New York State Department of Taxation and Finance describes the source side plainly in its nonresident FAQ: New York source income includes "earnings from work performed in New York State." For employers, that source rule is what drives withholding in the office state.
How much of the salary the office state claims normally depends on time. The Illinois Department of Revenue states the method in its employer withholding guidance: once a nonresident performs significant service in Illinois for more than 30 working days, the Illinois-taxable share of pay is based on the proportion of working days spent in Illinois. Other states use similar workday ratios, so a reliable count of where each day was worked is the core record for any hybrid arrangement.
How the home state treats the same income, including any credit for tax paid to the office state, depends on the home state's own rules. Check those rules for each home state on your roster before deciding whether to withhold for it as well.
Some states set a minimum number of days before an employer must withhold for a nonresident. These thresholds matter for hybrid staff who visit an office occasionally and for employees who travel for client work.
| State | Threshold for nonresident employee withholding | Key condition |
|---|---|---|
| Illinois | No withholding for a nonresident with fewer than 31 days of service in Illinois | Applies unless the pay is otherwise localized in Illinois |
| Arizona | Wages excluded from withholding if the nonresident is present for fewer than 60 days in a calendar year | Employer must have property, payroll and sales in Arizona |
Illinois states that withholding is not required for "compensation paid to a non-resident employee who has performed less than 31 days of service in Illinois," subject to its localization rules.
Arizona's rule is in statute. A.R.S. 43-403 excludes wages paid to a nonresident employee of an employer "having property, payroll and sales in this state" who is "physically present in this state for less than sixty days in a calendar year." Days in transit, personal days, and training or meetings not directly connected to the employer's Arizona operations do not count toward the sixty.
Two points apply to every threshold. A hybrid employee with a regular office schedule will usually exceed it within a few months, so thresholds help mostly with occasional visitors. Thresholds also differ in how they count days, so the count used for one state cannot simply be reused for another. Many states have no threshold at all, and in those states withholding can apply from the first day worked there.
Where two states have a reciprocity agreement, the employer withholds only for the home state, even on office days. The multi-state payroll 101 guide linked above lists several state pairs. For a hybrid commuter, the practical issue is the paperwork.
Illinois shows how it works. According to the Illinois Department of Revenue, withholding is not required for "compensation paid to residents of Iowa, Kentucky, Michigan, and Wisconsin." The exemption is not automatic. The employee must complete Form IL-W-5-NR, and the department warns: "If your employee does not complete this form, you must withhold Illinois Income Tax." An employee who moves out of the reciprocal state must notify the employer within 10 days.
For hybrid staff, keep the reciprocity certificate on file before the first paycheck, and set a calendar reminder to confirm the employee's residence each year. A reciprocity exemption that outlives the employee's move is a common source of under-withholding.
Assume an employer with its only office in Chicago and three hybrid employees who live in different states. Each works 230 days a year.
| Employee | Home state | Days worked in Illinois | Illinois treatment | Wages sourced to Illinois |
|---|---|---|---|---|
| A | Wisconsin | 138 (3 days a week) | Reciprocity with Form IL-W-5-NR on file | $0 for Illinois withholding |
| B | Indiana | 92 (2 days a week for 46 weeks) | No reciprocity; above the 30-day mark | $52,000 of a $130,000 salary |
| C | Missouri | 20 (quarterly team weeks) | Fewer than 31 days | $0 for Illinois withholding, unless localized in Illinois |
Employee B's allocation is 92 divided by 230, which is 40 percent. Forty percent of $130,000 is $52,000 of Illinois-source wages, leaving $78,000 attributable to days worked at home in Indiana. Payroll would withhold Illinois tax on the Illinois share and handle Indiana withholding under Indiana's rules for its residents.
Employee A sits in the office more often than Employee B, yet Illinois withholding stops once the reciprocity form is on file. Employee C's visits stay under the Illinois count. The example shows why the employer needs both a day log and the right forms: the same office generates three different answers.
A small number of states tax home-working days as if they were office days when the employee works at home for personal convenience. For hybrid staff assigned to an office in one of those states, the workday ratio above may not apply.
New York is the best known. The same New York nonresident FAQ says that for an employee whose primary office is in New York, "your days telecommuting are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location." In practice, a hybrid employee living in another state and assigned to a New York office can have all of their days treated as New York days. Their home state may also tax them as a resident, so double taxation is possible.
The multi-state payroll 101 guide linked in the introduction lists the states that apply a version of this rule, including New Jersey's 2023 law. If a hybrid employee is assigned to an office in a convenience state, review the rule before treating home days as home-state days.
Income tax withholding can split between states. State unemployment insurance generally should not. The localization-of-work provisions in U.S. Department of Labor UIPL 20-04 Attachment I state that their objective is "to cover under one state law all of the service performed by an individual for one employer wherever it is performed." The tests run in order: localization, base of operations, direction and control, then residence. The SUI section of the multi-state payroll 101 guide sets out each test and 2026 wage bases.
The hybrid case turns on the first two tests. Service is localized in a state if it is performed entirely there, or if work outside the state is only incidental. A hybrid employee who works two or three days a week in each state usually does not meet that test, so the analysis moves to the base of operations: the fixed place from which the employee starts work, provided some service is performed in that state. Which place that is depends on the facts of each arrangement, so document the answer for each hybrid employee and register for SUI in the state the tests point to.
The suspension of the employee home office deduction, first set to run through 2025, is now permanent. The One Big Beautiful Bill Act amended 26 U.S.C. 67, and subsection (h) now reads that "no miscellaneous itemized deduction shall be allowed" for "any taxable year beginning after December 31, 2017," with no end date. The same law carved out a new itemized deduction for educator expenses in subsection (b)(13), effective for tax years beginning after December 31, 2025. Unreimbursed home office costs of ordinary W-2 employees remain nondeductible.
Employers can still cover those costs tax-free through an accountable plan. IRS Publication 15 requires the plan to make employees substantiate expenses and return any excess within a reasonable period, and confirms that "Amounts paid under an accountable plan aren't wages" and are not subject to income, social security, Medicare or FUTA taxes. Our guide to accountable plans and tax-free expense reimbursement covers plan design. A flat monthly stipend with no substantiation does not meet those rules and is taxable wages.
A hybrid employee with wages in two states needs both states shown on the W-2. The 2026 Form W-2 instructions explain that boxes 15 through 20 "can be used to report wages and taxes for two states and two localities." For an employee with a third state, the instruction is: "If you need to report information for more than two states or localities, prepare a second Form W-2." Each state's figures must reconcile to the state withholding returns filed during the year, so the allocation used on payroll should match the allocation reported at year end.
These steps put the rules above into a routine:
Employees who work from another country raise treaty and corporate tax questions that state rules do not answer. For that case, see our guide to US-UK permanent establishment risk for remote employees.
Do I withhold for both states for a hybrid employee working in two states? Often yes. The office state generally taxes the days worked there and the home state taxes its residents, so withholding can apply in both. A reciprocity agreement, a nonresident day threshold or a convenience-of-the-employer rule can change that result.
How do I calculate how much salary belongs to each state? Most states use a workday ratio. Divide the days worked in the state by total working days and apply that share to wages. Illinois, for example, bases the taxable share on the proportion of working days spent in Illinois once the employee passes 30 working days there.
Which state gets unemployment tax for a hybrid employee? One state. The localization rules in UIPL 20-04 apply four tests in order: localization, base of operations, direction and control, then residence. Register and report SUI only in the state those tests identify.
Can a hybrid employee deduct a home office in 2026? No, if they are an ordinary W-2 employee. The One Big Beautiful Bill Act made the suspension of miscellaneous itemized deductions permanent, apart from a new educator expense deduction. The employer can reimburse qualifying costs tax-free under an accountable plan.
Does one office visit a month create withholding in that state? It depends on the state. Illinois does not require withholding for a nonresident with fewer than 31 days of service there, and Arizona excludes nonresidents present for fewer than 60 days if the employer meets its conditions. Many states have no threshold, so check each state before relying on one.
Madras Accountancy supports US CPA firms and businesses with payroll, bookkeeping and tax preparation work, including the multi-state records that hybrid teams create. To talk through your workforce footprint and payroll setup, contact our team.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
