Need to file state taxes when you live and work in different states?
Most people in the U.S. live and work in the same state, which makes state taxes pretty easy to understand – you pay taxes to the state where you live and work.
But what if you live in one state and work in another? Do you pay taxes to the state where you live? Where you earn an income? Both?!
You need to pay taxes to both. Most likely you will end up having to file a resident return in the state where you live and a nonresident return in the state where you work.
Resident return
Generally you need to file a resident return in the state where you are a permanent resident. This state has the right to tax ALL of your income, wherever it was earned.
Nonresident return
After you file your resident return in your home state, you then need to go about filing a nonresident return in every other state where you earned money. A nonresident return only taxes you on the money you earned in that state. What often happens is that you withhold some income for each state tax.
Let’s take a real-world example.
Let’s say you live in New Jersey and commute to your NYC job Monday through Friday. Come tax time, you would need to file a resident return in NJ (reporting all of your income) and a nonresident return in NY (reporting only the income you earned in NY).
Worried about being double-taxed? Don’t be. You will have an opportunity to claim a credit for taxes paid to the nonresident state. They will then divide whatever has been withheld between them and the state whose tax liability was not exactly met will either give you a refund or a tax bill.
States without an income tax
There’s always an exception to the rule. In this case, there are seven exceptions. The five states with no income tax and the two states that only tax interest and dividends are the exclusions:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
- Tennessee
- New Hampshire
If you live in one of these states, you don’t need to file a resident return (unless you live in TN or NH and have interest and dividends income). But if you work in a state that does have an income tax you have to file a nonresident return in that state.
The same holds true when the situation is reversed. If you live in a state with an income tax, you must file a resident return there. But if you work in a state without an income tax, you don’t have to worry about filing a nonresident return.
Sound complicated? There’s a reason for that: it is. But let’s not stress because here’s all you really need to know. For this to work, every state needs to make agreements with every other state covering the income they could both theoretically tax. These agreements are structured to generate a minimum amount of paperwork and special cases: instead of having some workers who lives in a state but doesn’t pay taxes, the states have someone who lives in the state and pays taxes like everyone else — but gets a special tax credit at the end of the year.
In a situation like this, it’s often best to talk to your payroll department about how to proceed. In places with many out-of-state commuters (like New York, New Jersey, and Connecticut, as well as cities near state borders), they will have the details on how each state treats out-of-state income.
Even if you have to file multiple state tax returns you can take care of them right here on RapidTax.
Hi,
Just moved to NC from NYC about a month ago and working from home for my same employer who is located in NYC. I haven’t changed my address on my w4 yet. Once I do, am I taxed based on NC tax withholdings or NYC. If you could also let me know any tax implications for my employer, as it is a small company and I am the first employee to work remotely. Thank you for your help!
Hi Samantha,
As soon as you begin working in another state (physically), you are responsible for that state’s tax guidelines. Your employer should begin withholding income taxes based on NC rules. However, if they continue to withhold NY taxes, you will file a part-year resident tax return for NY in order to be refunded the tax money back. You will owe completely based on NC rules once you move. Employees are not responsible for state taxes where they reside and physically work as opposed to where their company headquarters is.
I currently live in Minnesota and work remotely for a company located in Wisconsin. The company is withholding only for Wisconsin taxes. Is this correct? I was told that I could file for a full refund of Wisconsin taxes at the end of the year and then have to pay into Minnesota. However, I read elsewhere that I’d have to pay Wisconsin taxes and then get a tax credit to lower the Minnesota tax amount owed. Which is correct?
Hi Howard,
Unless you were told otherwise, you are responsible for taxes in the state where you reside and physically work. In your case, that would be Minnesota. If your company is withholding taxes for Wisconsin, you should receive that money back come tax time. To do so, you’ll need to file a non-resident tax return for Wisconsin along with your resident state return for Minnesota. Keep in mind that you will owe for Minnesota if your company is not withholding state tax as of now. However, the refund you receive for taxes paid to Wisconsin should put a dent (or even cover) what is owed to Minnesota.
I think my situation may be a little unique. I am currently living in NJ but will be moving to NC in July. I am being laid off as of 9/30. My severance package will start 10/1 which will be the equivalent of my pay for 12 additional months. My company will only tax me on NC income taxes because I’ll be working and living in NC effective in July but only through 9/30. Because I will have a severance that takes me into 2017, what are my obligations this year and next?
Thank you for your help.
Hi Michi,
Although you will no longer be with the company, your former employer will still be required to issue you a W-2 for the severance pay that will bring you into 2017. That amount is fully taxable and should be reported in the income section of your tax return each year. Your W-2 will split how much you received for each year so it should be a bit more visually straight forward once you receive the form in hand.
Hello,
I live and work in FL, but my employer is based in NJ. I get paid directly from NJ office and they withhold taxes: social security, medicare, income tax, unemployment, disability. Should they withhold these taxes?
If, the taxes are not suppose to be withheld – how can I correct it?
I received my first paycheck already and wanted to see if I was on the right track. My payroll department is not that helpful.
Sorry, I am new to the work force,practically just got out of college.
Thanks in advance for your assistance.
Hi Lenora,
Congrats on the new job and no need to worry! Taxes can seem intimidating when you are first faced with them. When it comes to withholding social security, medicare, etc… those are withheld on the federal level (by the IRS). You are taxed federally on your paychecks regardless of the state you work in. What you want to pay more attention to is which state you are having taxes withheld for. You should not have NJ taxes withheld from your income since you are physically working and earning an income in FL. That being said, some employers do not follow these rules and continue to withhold tax from the state that they are headquartered in. If this is the case for you, speak with your payroll department first and make sure that they are aware that you are living and working in Florida (which is income tax-free). If they won’t budge, you will simply file a non-resident NJ state tax return along with your federal tax return. Once you complete this, your tax will adjust accordingly and you will be issued a refund for the unnecessary tax that you paid to NJ throughout the year. If you have any trouble come time to file your taxes, feel free to reach out to our tax team.
I just accepted a position in CA hence i will be living and working in CA full time. However my wife and kids will continue to reside in our residence in NY. What are the taxes i will be liable for in both NY and CA? Much appreciated!
Hi Austin,
Typically, state residency is dependent on the amount of time you live in the state and your intentions to stay there permanently. Seeing as you will be working and living in CA while your spouse and children will be residing in NY, you may benefit more by filing a joint federal tax return but separate state tax returns as married filing separately. The reason being is that if you file separate state tax returns, you will be independently responsible for your own adjusted gross income instead of being taxed on a combined AGI by NY and CA.