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.
I live in IL. My employer is in IL and I was paid out of IL and received only IL W2. I worked part of the year in CA, but was paid out of IL. Do I have to pay CA state taxes? My employer withed IL state taxes on all money earned while in CA.
Hello John,
If your W-2 statement shows only IL withholding (Box 15-20), then you would only be required to file an IL return and would not have to file a CA return; because your employer did not report any income being earned in CA but only in IL. Whether or not your employer should have reported income earned in CA rather than IL is a question we cannot address and may be brought to a payroll professional. Thank you.
Please help me understand my paycheck: Living in CT and working NYC…When I receive a paycheck, will I lose a combined 12% to state income tax (6% CT and 6% NY)? And then when I file my taxes, I will receive all (or almost all) of the taxes I paid towards NY back to me via a credit / refund?
Since you were a resident of CT and a Non-Resident of NY, you will be able to receive a credit from CT for taxes paid to NY. You may possibly receive some or all the taxes paid to NY as a credit from CT.
Rapidtax expertly handles resident and non-resident returns. Click here to begin today.
thank you…so I am in fact losing a combined 12% to state income tax (6% CT and 6% NY) then?
We have employees who work in Pennsylvania, but are residents of other states. Some states have higher tax rates than Pennsylvania’s 3.07% tax rate. In these cases, are we (as the employer) required to withhold the Pennsylvania tax (since they work in Pennsylvania), AND also withhold an additional amount to cover remaining difference between Pennsylvania’s rate and the employee’s resident state?
Pennsylvania has reciprocal agreements with six states: Indiana, Maryland, Ohio, New Jersey, Virginia, and West Virginia. Unless your employee is a resident of a reciprocal state, you must withhold Pennsylvania personal income tax. It is best to contact your state authorities to determine what taxes are to be withheld for each respective state.
I worked in NY , but paid NJ tax only as per the pay stub ( I live in NJ ). At the end of the year , I filed a return for both states and Federal. Is that accurate? Based on what you stated, it sounds like I should get a refund from NY.
If I live in NJ and work in NY, should my paystub have taxes for both; or, should it have one/either? At tax time year-end, do I file for both New York and NJ though?
For which states you file will file for the tax year will depend on how your payroll department files your taxes. Within your income statement, the state information indicated will help you determine if you need to file for both or for the other. If it only has one state, you will just need to file for that specific state, and it would apply the same as well if it were two states. which would require that you file for both.