This article is for employers who need to understand how the Convenience of the Employer (COE) rule affects the tax obligations of remote employees.
The COE rule is an exception to the general golden rule for setting a work location for remote employees.
Note: If you have questions about which work address to use for an employee in Gusto, work with a tax advisor or accountant. We cannot advise.
When an employee lives in a different state from their employer, it can be hard to know where income tax is owed. Three rules may apply:
The golden rule: Employees generally need to file income tax returns and pay taxes in both states.
Employees can avoid double taxation by requesting a state income tax credit on their personal tax return.
Reciprocal agreements: The employer withholds income tax only in the employee’s resident state.
This means the employee does not need to file for a credit for taxes paid to another state. They only have tax withheld in one state.
Note: Many states do not offer individual income tax reciprocity.
The COE rule: If an employer requires an employee to work in another state, the employee’s work address should be the employer’s office, not their home address.
This means the employer does not have to register and pay unemployment tax (or other taxes) in the employee’s resident state.
If the employee chooses to work in another state for their own reasons, taxes are typically owed in both states (per the golden rule).
What counts as “employer’s convenience” varies by state. Make sure you review the state-specific criteria.
If the COE rule may apply in your state, work with your tax advisor and accounting partners to:
Discuss the implications of the COE rule.
Apply to the state to use the COE rule, if it applies.
Determine which office (work address) to assign remote employees to.
The COE rule may apply in these states. Additional resources are included for each.