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.
Tax Advisor,
I’m a little confused. I have had many friends who work for consulting companies, and work in various states during the year, but only pay taxes, in the state they are a resident, not for every state they worked. Matter of fact, I have never heard of a consultant paying taxes in all the states they physically work at during the year. I worked for the Fed gov for years and traveled all over the country and worked in multiple states, but again only paid taxes in my state of residence. It was my understanding you only have to pay tax in another state if you physically work there for anytime after 6 months of the year, because you are considered a resident at that point.
My question is, I am a WA resident, and a consultant. I work part of the year (less than 6 months) on site in CA. So do I have to file a non-resident tax return for CA? If so this goes against everything I have witnessed and understood from other consultants working in various states on site. I just have never seen it happen, so just wondering. It seems unreasonable you would have to file a state tax return for multiple state for working days at a time. That sounds like an absolute nightmare. It would cost you more paying your accountant to file all these returns than what you make.
Hi Gary,
I can see where you are coming from. However, you can be taxed where you physically work even if it is more than one state. What is more or less comes down to is your W-2 form that your employer issues each year before you file your taxes. Whichever states are listed on your W-2 are the states that you are responsible for filing a return for.
Hello,
This is a bit off topic, but along the same lines. If I am a business owner that does business in other states, must I file taxes in those other states?
Hi Kevin,
As a business owner, the rules for filing taxes are a bit different. I suggest contacting the appropriate state department of revenue for specific rules.
Hi, a few years ago I moved from Kentucky to Arkansas to attend school. Last December I graduated and stayed in Arkansas to work. I go home throughout the year and still have KY plates, driver’s license, etc but I live in Arkansas full time. Is there anything I need to file for Kentucky? Or because I live and work full time in Arkansas is this considered my only state of residence? Thank you!
Hi Sara,
I suggest double checking the residency rules for both Arkansas and Kentucky. Each state goes by their own set of guidelines.
I live in Tennessee but own and operate a small business in Mississippi. I have 3 part time employees, two live in Tennessee, the third lives in Mississippi. The address I use for business purposes is my home address. Other than federal, what tax forms should Ifile and where? And if anything is supposed to be filed in Mississippi, can I go back and file for previous years without penalty?
Hi,
I suggest taking a look at the business section of the Tennessee government website. This section is solely for employers who reside in Tennessee and should be able to specifically answer your questions.
I live in PA but work in MA. Should my employer deduct both (live in) PA tax and MA state tax? Thanks!
Hi Lisa,
You will always be taxed in the states in which you live and work. However, if you receive your W2 and only one state is listed, then you are only responsible for filing a state return with that state.