If your morning commute takes you from kitchen to couch, consider it a win. After all, what could be better than skipping roadway hassles and diving straight into your workday? It took years to convince your employer that you'd make an ideal telecommuter. Now you are enjoying the fruits of your labor, a perfect blend of working at home and traveling to consult with clients in other states.
It's all going according to plan — until tax time arrives. Suddenly, you're faced with paying taxes in your state of residence and the states in which you work. Or are you? The Internet of Everything is abuzz with questionable tax advice for people working in one state and living in another, including a few dubious suggestions that you're pretty sure could land you in hot water.
To make matters more complicated, the rules and regulations covering personal income tax vary from state to state. If you commute across state lines to get the job done, it can have specific and surprising consequences on your personal income taxes. These 10 tax tips can help you navigate the way.
10: Residency, Non-residency and Your State Taxes
If you're living and working in two different states, you'll need a firm understanding of key tax-related definitions. The distinctions between residency and non-residency — and, more importantly, how they affect your taxes — vary from state to state. You'll want to investigate the tax rules and regulations that apply to the states in which you live and work.
It may seem obvious, but it's worth mentioning that the state in which you reside is considered your state of residency. In general, you'll pay state taxes on all the personal income you earn in your home state (unless you live in a state without personal income taxation).
If you work in a state but don't live there, you are considered a non-resident of that state. You will probably be required to pay taxes on any income you earn there, too. Some states have an earned-dollar threshold that must be met; others have a time threshold. In Massachusetts, for example, non-residents are required to file state taxes if the income they earn in the state exceeds $8,000 or reaches a certain portion of their overall income. In Kansas, non-residents are subject to tax withholding from the first day they travel to the state for work [source: Massachusetts Department of Revenue].
9: Know the "First Day" Rule
A blast of chilled air finds its way into the jet bridge, offering a greeting as bracing as it is refreshing. You deplane and check emails on your smartphone while walking through the Denver International Airport. It may not look like you're clocked in, but you are mentally preparing for a business meeting. And even though you don't live in Colorado, today you'll be part of its workforce — if only for about 24 hours.
You may not realize it right now, but you'll soon join Coloradans in paying income tax, too. That's because Colorado, like nearly two dozen other states in America, operates under a "first day" rule. This means non-resident workers will owe Colorado state taxes even if their work there is temporary. Once you set foot on "first day" soil for work, you'll pay the price come April 15.
In addition to Colorado, there are "first day" personal income tax regulations in Alabama, Arkansas, Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Carolina, Ohio, Pennsylvania and Vermont. If you travel for work, it's a good idea to brush up on state tax code or consult a knowledgeable tax professional [source: Povich].
8: Understand the State Waiting Period
There are great variations among states when it comes to requiring non-residents to pay taxes. In addition to the "first day" rule, a tax regulation that requires temporary workers to pay taxes on income earned while in those states, some states have a waiting period. This waiting period allows non-residents to earn income in the state for a specific period of time before subjecting that income to taxation.
For example, in some states, you can be a non-resident who works in-state for 10 to 60 days (it varies by state) before becoming liable for non-resident income tax. Alternatively, a handful of states have earned income thresholds instead of waiting periods. In these states, you could earn anywhere from $300 to $1,800 a year before becoming subject to state income taxes [source: Povich].
There are seven states, as well as Washington, D.C., in which personal income tax is not withheld for residents or non-residents. Despite this lack of income tax, you may still need to file a tax return in those states if you live or temporarily work there. Read the next page to discover which states are tax-free and why you still need to claim income you earn there.
7: Working in a Tax-free State Is Still Taxing
There are seven U.S. states that do not withhold income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states — New Hampshire and Tennessee — tax interest and dividend income, but not earnings [source: Dzombak].
Still, that doesn't mean you won't pay taxes on the income you earn while working in these nine states. If you work in one or more of these income tax-free states — but live in a state that does withhold income tax — you'll still need to pay taxes on the money you earned in the tax-free state. You'll claim these earnings on the tax return you file in your resident state.
For example, Lois lives in New Mexico but earned an income of $25,000 while working in Texas. Lois won't owe any personal income taxes in Texas, because Texas is one of the nine states in the U.S. that doesn't require its workers to pay personal income tax. However, because Lois lives in New Mexico — and New Mexico is a state that withholds personal income tax — she will need to report her Texas income on the taxes she files in New Mexico [source: IRS].
6: State Income Tax Isn't the Same as Federal
When it comes to paying personal income tax, it's rarely as simple as "one and done." Especially for people who live in one state and work in another.
Don't fall into the trap of thinking that if you file federal taxes, you've covered all the bases. State income taxes follow entirely different rules and regulations. What's more, these rules and regulations vary by state. People who live in one state and work in another could find themselves filing tax returns in multiple states. In fact, there are accounts of road warriors who work in as many as 20 or 30 states, each with different rules for reporting income for taxes [sources: U.S. Tax Center, Povich].
This presents a significant record-keeping problem ... not only for workers, but also for the companies that employ them. As a result, some multi-state companies, as well as tax professionals, are turning to software developers for programs that can track interstate taxation among employees. However, the complexities — and ever-changing nature of the tax code — make it a monumental task.
For example, some regulations tax non-resident workers who enter the state for one day, which poses issues for workers who might do business on a smartphone during a lengthy layover or attend a conference at which work is discussed [source: Povich].