H1B Remote Work 2026: Is Your Employer Over-Withholding Tax?

Remote Work from Abroad: Is Your U.S. Employer Withholding Too Much?

You’re working from your laptop in Bangalore or Manila, but your paycheck still shows California or New York state tax. Are you overpaying a government whose soil you haven’t stepped on in months?

As we navigate the 2026 visa crisis, thousands of H-1B holders find themselves in a peculiar situation: they are digitally present in their U.S. offices but physically located thousands of miles away. While your work continues seamlessly over Zoom and Slack, your payroll taxes might be stuck in a time warp.

At KKCA, we are seeing a massive trend of “over-withholding” for stranded workers. If you are working from abroad, you might be giving the U.S. government an interest-free loan that you didn’t sign up for.

The “Source of Income” Rule: Location is Everything

The most critical concept in H1B remote work taxation 2026 is the “Source of Income.” Under IRS rules, the source of compensation for labor or personal services is the physical locationwhere the services are performed.

• The Reality: If you are sitting in a home office in India or the Philippines, that income is technically Foreign Sourced Income, even if it’s paid by a U.S. company into a U.S. bank account.
• The Problem: Most automated payroll systems (like ADP or Gusto) are set up to withhold taxes based on your U.S. office address. If your paystub still shows Federal and State tax withholdings while you are abroad, you are likely overpaying.

State Tax Nexus: Why State Taxes Are the Biggest Culprit

U.S. States (like California, New York, or Massachusetts) are aggressive about taxing income. However, most states only tax non-residents on income sourced within that state.

If you have been stuck abroad since the start of 2026, you may no longer have a “nexus” or residency in that state for tax purposes. Paying 5% to 10% in state income tax for work performed entirely outside the U.S. is often unnecessary. However, claiming this back during tax season is a hurdle—it is much better to stop the withholding at the source.

The 1040-NR vs. 1040 Dilemma

Your withholding is dictated by the forms you have on file with your HR department.

• If you are classified as a Resident Alien(passing the Substantial Presence Test), you file Form 1040.
• If you fail the test because of the 2026 visa delays, you become a Non-Resident Alienand must file Form 1040-NR.

On a 1040-NR, you generally only pay U.S. tax on “effectively connected income.” Income earned while physically abroad is often exempt from U.S. tax for non-residents. If your employer continues to withhold as if you are a resident, your take-home pay is significantly lower than it should be.

Steps to Fix Your Withholding While Stranded

If you anticipate being abroad for more than 90 days in 2026 due to visa appointment cancellations, take these steps immediately:

1. Notify HR in Writing: Formally document the date you began working from outside the U.S.
2. Request a Withholding Adjustment: Ask if your company can stop state tax withholding if you no longer meet the state’s residency requirements.
3. Update Form W-4: You may need to submit a revised W-4 to adjust your federal withholding to reflect your change in tax residency status.
4. Watch for Double Taxation: If you are paying taxes to your home country (e.g., India) on this same income, you must coordinate your U.S. withholdings to avoid paying twice.

How KKCA Can Protect Your Paycheck

Navigating payroll compliance from across an ocean is daunting. KKCA specializes in helping H-1B holders and their employers synchronize their tax obligations. We can help you calculate your “Estimated Tax” correctly so you keep more of your hard-earned money in your pocket now, rather than waiting for a refund in 2027.

Looking for personalized tax services about your specific tax situation, please contact us. We are here to help you with your specific tax matters.

Disclaimer

This blog is intended for informational purposes only and does not constitute legal or tax advice. Please consult a qualified U.S. CPA or tax attorney for guidance specific to your situation.