In Gusto, “home state taxes” is a bit of a misnomer: the platform assigns state withholding based on the work address you enter for each employee, not their home address. The employee’s home state only comes into play in specific situations — a reciprocal agreement between the two states, a convenience-of-the-employer rule in the employer’s state, or a relocation that changes where the employee actually works. Understanding which situation applies to each employee is what keeps your multi-state payroll clean.
How Gusto Decides Which State to Withhold For
The default rule Gusto follows is physical presence. Whichever state the employee performs work in is the state whose income tax tables Gusto uses, the state that receives the deposits, and the state that appears on the year-end W-2. A New Jersey resident commuting to a Manhattan office has New York tax withheld, not New Jersey tax, because New York is where the work happens.
That makes the work address in an employee’s profile far more consequential than a routine HR field. It controls the withholding formula, the receiving agency, and the W-2 allocation. Enter a home address where you should have entered a work address, and Gusto will send money to the wrong state and hand the employee a filing headache in April.
One boundary worth noting: eight states impose no individual income tax at all — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. If the work address sits in one of these states, Gusto calculates no state income tax withholding. Unemployment insurance registration still applies, but the state income tax line stays blank regardless of where the employee lives.
When a Reciprocal Agreement Shifts Withholding to the Home State
About 16 states and the District of Columbia have reciprocal tax agreements with neighboring states. Under these agreements, a resident of one state who works in the partner state has income tax withheld only by the home state. A Pennsylvania resident working in New Jersey has Pennsylvania tax withheld and no New Jersey tax. To activate this treatment, the employee files a nonresidence exemption certificate with the employer. For the NJ-PA scenario, that form is the NJ-165.
You are responsible for collecting the correct certificate and keeping it on file. Gusto will apply the reciprocal treatment once you confirm the employee qualifies, but the platform depends on you to verify the paperwork. If the employee never files the certificate, Gusto keeps withholding for the work state by default, and the employee has to recover the overpayment when they file their personal return.
When no reciprocal agreement exists between the two states, Gusto withholds for the work state, and the employee claims a credit on the home state return for taxes paid to the other jurisdiction. That credit usually prevents true double taxation. It isn’t always a wash, though: if the work state’s rate is higher, the employee pays the higher rate overall; if the home state’s rate is higher, the credit covers the work-state tax and the employee owes the difference to the home state. Gusto’s role is to withhold accurately for the work state and produce a W-2 with wages and withholding broken out by state so the employee can claim the credit.
Convenience of the Employer States
A handful of states run the rule in the opposite direction. Under a “convenience of the employer” rule, if a remote employee works from another state for personal reasons rather than a business requirement, the employer’s state still claims the right to tax those wages. New York, Connecticut, Pennsylvania, Delaware, Nebraska, Massachusetts, and Arkansas all enforce some version of this rule. Alabama effectively joined after a 2023 tax tribunal decision held that a remote worker’s employment by an Alabama-based company was taxable by Alabama regardless of where the work was performed. New Jersey enacted a retaliatory version in 2023 that mirrors whatever convenience rule the employee’s home state would impose on New Jersey residents.
The impact hits hardest in border regions. An employee of a New York company who lives in Connecticut and chooses to work from home is still subject to New York withholding, unless the employer can show the remote arrangement is a business necessity rather than an employee preference. That’s a factual determination, and getting it wrong exposes the employee to back taxes in the employer’s state.
Gusto does not detect convenience-of-the-employer situations automatically. If your business sits in one of these states and you have remote employees elsewhere, you have to configure the platform manually so the primary withholding goes to your company’s state rather than the employee’s work location. Skip that step and Gusto withholds for the wrong jurisdiction by default.
When an Employee Moves to a New Home State
Relocations are one of the most common triggers for multi-state payroll trouble, and Gusto won’t act until you update the record. Once the employee tells you they’re moving, collect three things: the new address, the date of the move, and whether they plan to return. Then get your business registered in the new state if you aren’t already.
Update the employee’s work address in Gusto and the platform will start applying the new state’s withholding rules from that point forward. If the employee worked part of the year in each state, the year-end W-2 should show both states with the correct wage allocation for each period, and the employee will likely file part-year resident returns in both.
If the old and new states have a reciprocal agreement, have the employee complete the appropriate exemption certificate so you avoid dual withholding. If not, the credit-for-taxes-paid mechanism handles the overlap when returns are filed.
Registering in a New State Before Gusto Can File
Gusto cannot file or remit taxes to a state where you aren’t registered, and that constraint applies whether an existing employee has moved or a new hire lives somewhere new. Before you run your first payroll in a new state you need two things: a state income tax withholding account number from the department of revenue, and a state unemployment tax (SUTA) account number with an assigned rate from the workforce agency. In most states these are separate registrations with separate agencies.
Gusto has partnered with Middesk to help with registrations. The platform identifies which accounts you need based on your payroll setup and connects you to Middesk to handle the actual filings with state agencies. You enter business details and responsible-party information through the Gusto dashboard; Middesk works through the state’s process. Once the accounts exist, you also authorize Gusto as a third-party agent so it can file and pay on your behalf.
After that, enter the withholding ID, SUTA ID, and assigned SUTA rate into Gusto’s tax settings for the state. The SUTA rate is unique to your business — states assign it based on your industry and claims history — and Gusto uses it to calculate the employer-side unemployment tax each pay period. Enter the wrong rate and deposits go out incorrect, which eventually triggers a state notice.
Without valid credentials in place, Gusto can calculate what withholding should be, but it has no way to actually send the money or file the required forms. The liability stays with you, and it accumulates every pay period until you catch up. A state that finally notices an unregistered employer typically wants back taxes, penalties, and interest running from that employee’s first day of work in the state.
Local Taxes Tied to Home and Work Addresses
State income tax is only one layer. Many jurisdictions impose income taxes at the city, county, or school-district level, and some of those local taxes are based on where the employee lives, some on where they work, and some on both. Ohio and Pennsylvania are the extreme cases, with hundreds of municipalities levying their own earned income taxes.
When you enter precise work and home addresses, Gusto maps them to local tax codes and applies the correct rates for supported jurisdictions, calculating the withholding and remitting to the local authority on schedule. Coverage isn’t universal, though. Small townships, special taxing districts, and newly enacted local taxes may not be in the system. You have to verify that every applicable local tax is being calculated for each employee, and if a jurisdiction isn’t supported you’ll handle that withholding and remittance manually outside the platform. Checking this when you set up an employee in a new location is much easier than discovering the gap during an audit.
What Gusto Won’t Handle
Payroll registration is not the only obligation that follows an employee into a new state. In most states, a single employee working from home is enough to create corporate income tax nexus, meaning the state can require your business to file a corporate income tax or franchise tax return there. The general thresholds many states reference include roughly $50,000 in payroll, $50,000 in property, or $150,000 in sales, but they aren’t universal and some states assert nexus from any employee presence at all. Pandemic-era safe harbors that exempted remote workers from triggering nexus have largely expired.
Gusto’s scope is payroll and employment taxes. It does not handle corporate income tax filings. If you’re hiring remote employees in states where you have no other footprint, talk to a tax advisor about whether the new payroll obligation comes with a corporate filing obligation as well.