State Taxes When a US Employee Moves Abroad

Relocating a US employee abroad does not end the company's US state and federal-unemployment obligations, and several of them are easy to overlook. State income tax follows the employee's domicile rather than their physical location, so a move overseas does not automatically switch off state withholding, and some states are slow to let go. Federal unemployment tax continues for a US citizen working abroad for a US employer, while state unemployment coverage works differently and is often elective. This guide sets out what a US company still owes at the state and federal-unemployment level when an employee moves abroad, and what changes when the worker is instead employed through a local entity or an employer of record.

State income tax follows domicile, not the employee's location

State income tax is based on an employee's domicile, so it does not stop simply because the employee has moved abroad. Domicile is the place a person treats as their permanent home, and it does not change until the old domicile is genuinely abandoned and a new one is established, which physical presence in another country does not by itself accomplish. Until that happens, the home state can continue to treat the employee as a resident taxable on worldwide income, and the employer generally continues state income-tax withholding to that state. Moving an employee abroad is therefore not a clean break from state tax; it depends on whether the employee has actually changed domicile and can evidence it.

California and New York hold on the longest

California and New York continue to tax residents who move abroad until domicile is genuinely abandoned, and each sets a demanding test for non-resident treatment. The table below sets out the two states' safe harbours, which a US employer with staff from either state should plan around.

Test	California (FTB Pub 1031)	New York
Non-resident safe harbour	Abroad under an employment-related contract for at least 546 consecutive days	At least 450 days in a foreign country within a 548-consecutive-day period
Return-visit cap	No more than 45 days in California per year	No more than 90 days in New York during the 548-day period
Main catch	Safe harbour is lost if intangible income exceeds USD 200,000 in a contract year	The convenience-of-the-employer rule can source a New York employer's remote wages back to New York

The New York convenience-of-the-employer rule is a non-resident income-sourcing rule, not a domicile rule, so it can keep a remote worker's wages taxable in New York even where the person is treated as a non-resident. The two states use different day counts and different catches, so the rule that applies depends on which state the employee is leaving, and New York's 90-day cap counts time in the state by the employee's spouse and minor children too, not only the employee. Full current detail sits with the California Franchise Tax Board and the New York Department of Taxation and Finance.

A state may still tax income the federal exclusion removes

The foreign earned income exclusion is a federal provision, and a state is not required to follow it. The exclusion sits in section 911 of the Internal Revenue Code and reduces federal taxable income, but state conformity varies, and California does not conform: the excluded amount is added back on the California return, so foreign earned income that escaped federal tax is still taxed by California for someone who remains a California resident. The detail of the federal exclusion, and the Form 673 that adjusts federal withholding, is covered in the guide to withholding US income tax for employees abroad. The point for state purposes is that a reduced federal bill does not mean a reduced state bill.

Federal unemployment tax continues abroad

Federal unemployment tax applies to a US citizen working abroad when the employer is an American employer. Under section 3306 of the Internal Revenue Code, service performed outside the United States by a US citizen for an American employer is covered employment for FUTA, so the employer keeps paying federal unemployment tax, an effective 0.6 percent on the first USD 7,000 of wages after the standard state credit, as set out in IRS guidance. One carve-out applies: service in a contiguous country with which the United States has an unemployment-compensation agreement, currently Canada, is treated differently. For Gulf-based assignments this does not arise, so FUTA continues.

State unemployment is narrower and often elective

State unemployment coverage for work performed entirely abroad is narrower than federal and is often elective rather than automatic. The familiar four-factor localisation test, which allocates a multi-state worker to a single state, applies where some service is performed in a US state, so it does not reach work performed wholly overseas. Work entirely abroad falls under a separate allocation for Americans employed abroad, which looks to the employer's principal place of business in a state, then the employer's US residence or organisation, and then an employer election, rather than automatically attaching to any state. Where the employer has no qualifying US nexus, state unemployment coverage can be elective, so the position should be confirmed with the relevant state rather than assumed.

What changes when an employee is employed abroad through an EOR

Each obligation in this guide is one layer of a larger stack a US company takes on when it keeps an employee on its own payroll abroad: state income tax, state unemployment, and federal unemployment, plus federal income-tax withholding and Social Security, plus the host country's own payroll, social insurance, and end-of-service rules. Running that split across two tax systems, and keeping each layer correct as the assignment changes, is the real cost of the do-it-yourself route. In the Gulf it is not even optional at the in-country layer, because a worker physically in Saudi Arabia or the UAE needs a locally sponsored visa and local payroll regardless, so a local employer is required there in any case. Employing the worker through a local entity or an employer of record consolidates both halves: the EOR becomes the legal employer in the host country and runs local payroll, so there is no US state income-tax withholding, FUTA, or state unemployment liability on the wages it pays, and the US-side questions in this guide then arise only for staff a US company keeps on its own US payroll. For employing staff in the Gulf without running US payroll across the border, see the Employer of Record service; for the US Social Security position on US-payrolled staff, see the guide to US employers and Social Security for staff in the Gulf.

About Aspirock

Aspirock is an Employer of Record and payroll provider operating across 70+ countries, with six global offices and over 22 years of combined experience supporting more than 5,000 workers. Every client works with a named account team that owns the deployment end to end, so contracts, payroll, visas, and compliance filings in each market are handled by people accountable for the outcome. For employer-of-record and international payroll support, see the Employer of Record service page.

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