In our previous post, we discussed the federal tax implications of living and working in different states. A more complicated matter is the issue of state income taxes. Here is what you need to know.
States have their own tax laws
The general rule for state income tax is that you will be liable for state income tax based on where you are when you perform the work or when the income is earned. Like Florida, six other states (Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming) have no state income tax. New Hampshire and Tennessee only tax dividend and interest income.
The states with income tax generally consider someone a resident of the state if they spend more than 183 days a year there. For example, Jennifer’s family home is in Orlando, but she travels to Raleigh, NC for work every week. She only spends weekends at home in Orlando. Jennifer would likely be considered a resident of North Carolina and would file a North Carolina resident tax return.
Some neighboring states have reciprocal agreements, so if you live in one, but work in another, you only pay income tax in the state where you live. But since Florida has no state income tax, you won’t find any states with reciprocal agreements for Florida residents.
Many states have a physical presence test that determines how long someone needs to spend working there before they need to pay state income taxes. Some states, such as Colorado and Alabama, require only a single day of in-state work to levy state income tax. Other states have a more generous threshold of 60 days of work before employees need to pay state income tax.
Other states have an income threshold. For example, Georgia requires that non-residents who earn a portion of their income in Georgia file a Georgia tax return if their compensation in Georgia is greater than five percent of all of their income, or $5,000, whichever is larger.
For example, Alan lives and works in Orlando, but his company sent him to Atlanta for a special assignment. Alan’s income for the whole year was $75,000, of which $7,500 was earned while he was in Atlanta. Alan will file a Georgia non-resident tax return for the $7,500 he earned working in Atlanta.
Remote workers follow different rules
If you work from home for an out-of-state employer, you’ll follow a slightly different set of rules. Most states will not levy income tax on remote workers who do their work from a location in another state. As long as you stay within the time limits of the physical presence test (or other filing requirements) for that particular state, you may only pay state income tax for your resident state. This means that Florida residents who work at home for out-of-state companies may pay no state income tax at all.
However, if your employer is in New York, New Jersey, Delaware, Pennsylvania or Nebraska, you’ll have to pass a convenience versus necessity test. That means if you work from home as a matter of convenience for yourself, you will likely pay state income tax on all of your income from that employer. If you can demonstrate that there’s a business necessity for you to work remotely, you might only pay state income tax for any time you were actually in the employer’s state. That business necessity might include meeting with clients who live in the state where you live.
As you can see from this overview, living and working in different states may have state and federal tax repercussions. If any of this applies to you, contact our office so we can help you navigate these complex rules.