Taxes are complicated enough. What makes things even more so is when you work in one state an live in another. Here's what to do.
Ryan Inman
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Living in one state and working in another or earning income in multiple states can complicate even the simplest of tax situations.
This applies whether you’re a W-2 employee living in one state and working in another or you’re performing locum tenens work and might be working in multiple states.
We’ve composed a guide to earning income from multiple states or living in one state and working in another to help prepare you for tax season.
In This Article
No. No matter where you work (as long as it is within the United States), you need to file an individual federal tax return using IRS Form 1040.
Whether you live and work in Ohio, live in Illinois and work in Indiana, or work as a traveling physician in multiple states, your federal tax situation does not change. Federal taxes are the same across all states.
This goes for W-2 employees, self-employed individuals, freelancers, or anyone earning an income in the United States. All US taxpayers fill out the same federal tax forms and file them with the IRS.
However, when it comes to state taxes, it can be a bit more complicated.
Each state has its own set of tax rules and tax forms. With 50 U.S. states, you can see how things might get messy quickly.
While tax laws vary from state to state, there are some general guidelines when it comes to earning income from multiple states or living in one state and working in another.
Typically, you pay taxes and file a tax return in the state you call your primary residence. This is regardless of where you work. So, if you work in the state of your primary residence, then you only need to file one state tax return.
If you live in one state and work in another, then you might need to file a tax return in your state of residence and the state in which you work.
The same concept applies if you live in one state and earn income in multiple states. You need to file a tax return in the state in which you live and a tax return in each state where you earned income.
Some states only require you to file a return if you earn above a certain amount of income in that state. It’s important to check your state’s rules to see what this number is.
No. Some states have reciprocity agreements that only require you to file a tax return and pay taxes in the state in which you live.
For example, if you live in Ohio and work in Michigan, you will only need to file a tax return and pay Ohio taxes since they have a reciprocity agreement with each other. This goes for W-2 employees and 1099 contractors.
This eases the tax filing burden of taxpayers who routinely work in one state and cross over the border to work in another state. Each state’s laws are different, so check with your state of residence to see if they have a reciprocity agreement with the state in which you work.
If your employer incorrectly withholds income tax for a state in which you work, even if you don’t need to pay taxes there because of a reciprocity agreement, you should file a state tax return with the state in which you worked, so you can receive a refund for the taxes that were incorrectly withheld from your paycheck.
You might need to file two state tax returns if the two states don’t have a reciprocity agreement with each other. You would file a resident tax return for the state where you live and a non-resident tax return for the state in which you work.
Don’t worry—you won’t pay double tax in this scenario, thanks to a 2015 U.S. Supreme Court ruling. This ruling states that it’s unconstitutional for multiple states to tax you on the same income.
So if you need to file two state returns, one resident and one non-resident return, your resident state must provide a mechanism such as a tax credit for you to reduce your tax liability by the amount of taxes you had to pay to your non-resident state.
These activities are much easier for W-2 employees who have employers withholding their taxes for them. If you are an independent contractor and receiving 1099s, you will have a lot more to handle on your own such as making quarterly estimated tax payments to all the states in which you work.
Performing locum tenens work in multiple states will make your tax situation a little more complicated.
When you work as an independent contractor, you receive 1099s instead of W-2s at tax time. This means you don’t have an employer who is withholding taxes and sending them to the IRS or state tax departments on your behalf. The responsibility is solely yours.
When you work as an independent contractor and earn income from multiple states, you need to understand the tax implications of each state you work in. Since you’re technically self-employed, you’ll be responsible for making quarterly estimated payments to the IRS and to each state in which you earned money.
This includes income taxes and self-employment taxes. Depending on how much money you made in each state, you might not have to send estimates. These rules are state-specific, so it’s wise to work with a tax accountant who knows the ins and outs.
When it’s time to file your taxes, you will need to file a federal tax return, a resident tax return for the state where you live, and a non-resident tax return for any state in which you worked.
Typically, you will record all of your income and deductions on your resident state tax return regardless of where it was earned. On your non-resident state tax returns, you will record only the income and deductions that apply to that particular state.
As we mentioned previously, your resident state must provide a mechanism like a tax credit to reduce your tax liability on their return by the amount of taxes you paid to the non-resident states where you earned money.
Here’s a quick example.
Since you work in State B, you will owe $5,000 in taxes to State B. Since you live in State A, you will owe $7,000 in taxes to State A.
However, because of the 2015 Supreme Court ruling, State A must provide a tax credit for the taxes you paid to State B. Thus, you would only have to pay $2,000 in taxes to State A.
In total, you’re still paying $7,000 in taxes, but $2,000 is going to State A and $5,000 is going to State B. If you decided to move to State B, you could reduce your tax bill by $2,000 per year since you live and work in the same state and would only be taxed at 5%.
Domicile is an important concept to understand. When you have domicile in a state, that generally means you have a home you reside in and you intend to return to or remain in that home.
You can only have a domicile in one state, and that state will levy taxes on your personal income, no matter where you worked to earn it. Each state’s laws about who is a resident are different, so you need to check the laws for each state to see if you may be considered a resident.
If you’re constantly on the go and don’t have a permanent state of residence, you will need to understand each state’s laws to determine how long you must live in that state to be considered a resident
In addition to working in multiple states or earning outside of your home state, there are a few other scenarios to consider when it comes to tax time.
If you work remotely for a company that’s headquartered in another state, you only owe taxes in the state where live since that’s where you’re performing the work.
For example, if you live in Montana and work remotely for a company that’s headquartered in New York, you only have to pay Montana state taxes.
This could be a great benefit if you live in a state with no income taxes and work remotely for a company with its HQ in a state that levies personal income tax.
You wouldn’t have to pay state income taxes and could reap the rewards of working for a company with great benefits and pay.
Another possibility for earning income from multiple states in the same year is if you move to a new state during the year. If you’re lucky enough to move to a state with no income taxes, you might not have to file a state tax return.
There are currently only 9 states that don’t levy a personal income tax:
Unless you move to one of these states, you’ll need to file multiple state tax returns. In this scenario, you would file a part-year tax return. Depending on the state, it will either be its own form, or a normal tax return, where you check a box stating you were a resident in that state for a portion of the year.
For example, if you lived in Ohio from January to June, moved to Colorado, and lived there from July to December, you would record six months of income on your Ohio tax return and six months of income on your Colorado state tax return.
Some states require you to record your full-year income on their tax return even if you moved out of state during the year. If this is the case, the state requiring you to record your full-year income should provide you with a tax credit to reduce your tax liability.
A major benefit of being an independent contractor is that you can deduct expenses from your income that traditional employees who receive a W-2 are not entitled to.
For example, if you perform locum tenens work and have to pay for scrubs or other work uniforms to perform your job duties, you can deduct the cost of the scrubs from your income to reduce your tax bill.
On the other hand, a physician who is employed by the same hospital and earning a salary will not be able to deduct the cost of the scrubs from their income. This is a huge benefit of being self-employed.
If you have to drive for your locum tenens work, you can also deduct mileage based on a predetermined rate set by the IRS. Your traditionally employed co-workers can’t take this deduction.
You will record your income and expenses on IRS form Schedule C if you’re an independent contractor performing locum tenens work. It’s even more important to track your income and expenses in detail when you earn income from multiple states so that you know how much money is allocated to each state.
Earning income from multiple states or living in one state and working in another can complicate your tax situation.
It’s important to understand the tax implications when you earn income from multiple states since you’re required to file multiple tax returns and pay different tax rates to different states.
This not only increases the number of forms you need to fill out but could also increase your total tax liability depending on which state you call home.
While you won’t have to pay double taxes in one of these scenarios, you may end up paying more tax than if you lived and worked in one state with a lower income tax rate.
If you’re unsure of how to handle one of the tax situations mentioned above, it may be a good idea to work with a tax accountant who’s assisted clients in a similar situation.
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