With more people working remotely and businesses expanding across state lines, earning income in multiple states is more common than ever.
Maybe you moved to a new state while working remotely, work with clients in different places, or run a business that serves multiple areas. No matter the reason, understanding how taxes work across state lines is important.
This guide breaks down the basics of multi-state taxes and gives you simple strategies to stay on top of your tax responsibilities.
What is Multi-State Taxation?
Multistate taxation happens when you earn money in more than one state. This means you might need to pay taxes in each state where you make money. This affects:
- Remote workers living in one state but working for a company in another
- Freelancers with clients in different states
- Businesses selling products or services in multiple states
- People who moved between states during the year
Each state has its own tax rules and rates, which can get confusing fast. For example, if you live in Georgia but work for a company in Florida, both states might want to tax your income.
How Does Multi-State Taxation Differ From Single-State Taxation?
When all your money comes from one state, taxes are simpler. But with multi-state income, things get more complex:
Multiple Filing Requirements: You might need to file tax returns in several states, each with different forms and deadlines.
Splitting Up Your Income: You’ll need to figure out how much of your income belongs to each state. States use different methods to calculate this:
- Allocation: Assigning specific income to one state
- Apportionment: Dividing business income among states based on factors like sales and property
Credits to Avoid Double Taxation: Most states offer credits for taxes paid to other states, but these don’t always cover everything.
Different Tax Rates: State income tax rates range from 0% in states with no income tax (like Texas and Florida) to over 13% in California.
Nonresident Filing Status: In states where you earn money but don’t live, you’ll file as a nonresident using different forms.
What is a Tax Nexus?
A “tax nexus” is a connection between you and a state that gives that state the right to tax you. Think of it as the legal foothold a state needs to make you pay taxes. Without a nexus, a state usually can’t tax you.
How is Nexus Determined in Multi-State Taxation?
Different things can create a nexus:
For Individuals:
- Living in a state, even temporarily
- Working in a state, including remote work
- Earning money from sources within a state
- Spending a certain number of days working in a state
For Businesses:
- Having offices, employees, or equipment in a state
- Reaching certain sales amounts in a state
- Having related businesses operating in a state
- Earning commissions from in-state referrals
Some states create a nexus if you work there for just one day, while others require 30+ working days.
Tim is a consultant who lives in Michigan but spent three weeks working on-site for a client in Illinois. Even though it was just three weeks, Tim now has a tax nexus in Illinois and needs to file a nonresident tax return there.
Who To Pay?
Figuring out which states to pay taxes to means understanding these key points:
- Resident State Taxation: Your home state can usually tax all your income, regardless of where you earned it.
- Nonresident State Taxation: States where you aren’t a resident can typically only tax the income you earned while physically in that state.
- Part-Year Resident Taxation: If you moved during the year, you’ll likely be a part-year resident in both states. Each can fully tax what you earned while living there.
- Tax Reciprocity Agreements: Some neighboring states have agreements that let residents work across state lines without filing nonresident returns. For example, if you live in Maryland but work in DC, you might only need to file in Maryland.
Sarah lives in Illinois but works remotely for a company based in Colorado. On top of that, she spent three weeks in Wisconsin working for a client. Since she earned income in multiple states, she needs to consider how each state handles taxes:
- Illinois will tax all her income because it’s her resident state.
- Colorado could tax her income if it had specific tax rules for remote workers (but currently, it doesn’t).
- Wisconsin will tax the income she earned while working there for three weeks.
Sarah needs to file a resident tax return in Illinois and a nonresident tax return in Wisconsin.
What Happens If You're Audited?
State tax audits involving multiple states can be tough. Here’s what to know:
Common triggers for audits include:
- Filing different information across state returns
- Claiming to live in a low-tax state while keeping ties to a high-tax state
- Not filing required nonresident returns
- Suddenly moving to a state with no income tax
During an audit, you might need to show:
- Travel records showing days spent in each state
- Work logs documenting where you performed services
- Utility bills and rental agreements proving where you lived
- Employment contracts
- Evidence for tax credits claimed
If you don’t comply with multi-state tax rules, you could face:
- Back taxes with interest
- Penalties for late filing
- Potential criminal charges in serious cases
- Damaged credit if tax liens are filed
How it Affects Independent Contractors
If you’re self-employed or a freelancer, multi-state taxes create special challenges:
- You directly establish nexus when working in different states, even for small amounts
- Many states require business licenses for independent contractors
- You need to track where you physically worked, client locations, and income by state
Maria is a freelance graphic designer who lives in Pennsylvania. She has clients in New York, New Jersey, and Ohio. Even though she works from her home office, she might need to file nonresident returns in states where her clients are located, depending on each state’s rules.
Tip! Using Invoice Fly’s invoice maker makes it easier to track client locations and categorize income by state, creating valuable documentation for tax filing purposes.
What Types of Taxes Are Subject to Multi-State Regulations?
Several types of taxes follow multi-state rules:
- Personal Income Tax: Most states tax individual income, though seven states have no income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming).
- Business Income/Franchise Tax: Businesses may owe these taxes based on their activities in various states.
- Sales and Use Tax: Businesses selling in multiple states may need to collect and send in sales tax.
- Employment Taxes: Employers with workers in multiple states must handle different unemployment insurance and withholding requirements.
- Property Tax: Property may be taxed where it’s located or where the owner lives.
How Multi-State Taxes Impact Home Service Businesses
Home service businesses like contractors, cleaners, landscapers, and repair companies face particular multistate tax challenges:
Service Area Considerations
Many home service businesses operate in metropolitan areas that cross state lines. For example, a plumber based in Kansas City, Kansas might regularly serve customers in Kansas City, Missouri, creating a nexus in both states.
Project-Based Work
Longer-term projects in neighboring states can trigger filing requirements, even for businesses primarily operating in their home state.
Equipment and Inventory
Storing equipment or inventory in multiple states can create nexus, even if the business owner doesn’t personally work in those states regularly.
Compliance Strategies
Home service businesses can manage multistate taxation by:
- Clearly tracking service locations using Invoice Fly’s reporting software
- Organizing invoices by state using Invoice Fly’s invoice templates
- Considering separate legal entities for operations in different states
- Evaluating whether to register for sales tax collection in states where services are performed
What Are the Common Multi-State Tax Issues?
If you run a service business like plumbing, cleaning, or landscaping, you face unique challenges:
- Many service businesses work in metro areas that cross state lines, creating nexus in multiple states
- Longer projects in neighboring states can trigger filing requirements
- Storing equipment in multiple states can create nexus
Joe’s Plumbing is based in Kansas City, Kansas, but regularly serves customers across the border in Missouri. Joe needs to track which services were performed in each state and might need to file tax returns in both states.
How Can You Determine Tax Liability Across States?
To figure out your multi-state tax liability:
- Track Income Sources by State: Record where income is earned, including:
- Where work is physically performed
- Client locations
- Days worked in each state
- Understand Allocation Rules: Learn how each state allocates different types of income:
- Wages: Usually based on where you physically worked
- Business income: Often divided using state-specific formulas
- Investment income: Usually taxed in your resident state
- Rental income: Generally taxed where the property is located
- Apply Apportionment Formulas: For business income, understand each state’s formula.
- Calculate Resident State Tax: Figure out your resident state tax on all income, then identify potential credits.
Calculate Nonresident State Taxes: For each nonresident state, determine income sourced there and calculate tax based on that state’s rules.
How Does Your Business Structure Impact Your Taxes?
Your choice of business entity affects multi-state taxation:
- Sole Proprietorships: Income goes directly to your personal return, so you’ll file nonresident personal tax returns where you have nexus.
- Partnerships and LLCs: These might need to file information returns in states where they operate and issue state-specific forms to partners.
- S Corporations: Not all states recognize S corporation status, and some tax them directly.
- C Corporations: These file their own returns in each state where they have nexus.
How Can You Manage Multi-State Tax Compliance?
Stay on top of your multi-state tax obligations with these strategies:
- Use Good Tracking Systems: Track days worked in each state, income by location, and business travel.
- Use Technology: Tax software designed for multi-state taxation can help calculate what you owe and generate the right forms.
- Create Clear Policies: If you have employees working across state lines, develop policies for tracking work locations.
- Consider Tax Planning: With professional help, look at strategies like timing income recognition or structuring business operations to minimize nexus issues.
- Stay Informed: Multi-state tax laws change often through new legislation and court decisions. Regularly check state tax department websites or talk with tax professionals.
Tip! Invoice Fly’s receipt scanner helps organize travel receipts and business expenses by location, creating valuable documentation for state tax compliance.
How Can Invoice Fly Help With Multi-State Income Tax
Working across state lines creates tax challenges, but with good planning and record-keeping, you can handle them. Remember that each taxpayer’s situation is unique, and state tax laws continue to evolve. When in doubt, talk to a tax professional who understands multi-state taxation.
Using tools like Invoice Fly’s invoice maker helps you track income by location and keep detailed records, making tax compliance much easier. By staying organized and proactive, you can grow your career or business across state lines.
Ready to live without the stress of unexpected tax bills?
Download Invoice Maker today!
