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Ozzie Gomez
- June 13, 2024
It’s increasingly common to work in one state but live in another. But if you live and work in different states, a key question arises – where do you pay state taxes?
The short answer is that it depends, largely, on where you live. In reality, though, this is a complex tax question which requires closer inspection. So, let’s consider the rules around whether you pay taxes in the state where you work or live.
The Definition of “Residency” for Income Tax
In the US, income is normally taxed where you live. In other words, it’s where you’re domiciled or where you are a resident. So, for example, if you live and work in the same state, you’ll pay tax on income earned in this state. But if you live and work in different states, then you may pay tax in both states.
What does residency mean, then, for tax purposes? Confusingly, each state has slightly different rules for establishing residency. But generally, for income tax purposes, your home state is either:
- The state you consider to be your home e.g. it has your main place of residence; or
- The state where you spend more than half the year.
To be clear, state residency matters because your home state can tax income earned inside and outside of the state. However, the state where you work, but don’t live in, can only tax earned income within the state’s borders.
So, now we’re clear on what residency means. Let’s take a deeper dive into whether you pay income tax by state of residency or state of employment.
Do I Pay Income Tax by State of Work or Residency?
People who live and work in different states may pay both resident and nonresident income taxes.
- Resident income tax: Payable to the state where you live.
- Nonresident income tax: Tax paid to the state where you work.
This could mean filing separate tax returns. It could also mean paying tax at very different state income tax rates. There are a few major exceptions to this general rule, though.
1. States with Reciprocity Agreements
If your home state has a reciprocity agreement with the state where you work, you’re only taxed on where you live. This is common between neighboring states so that workers can easily cross state lines to work.
These agreements eliminate the need for filing two tax returns. However, you need to request this protection from your employer. It’s not automatic! To request protection from filing two returns, tell your employer to withhold tax based on where you live, not the state where you work.
2. Employer Test
Some states, such as New York, have a “convenience of the employer” rule. It affects remote workers.
It’s a complicated rule. Basically, it means that you pay income tax to the state where your employer is based even if you live elsewhere. So, if your employer is based in NY, and you live elsewhere, you’re still subject to NY income tax.
There’s an exception, however. You’ll only pay income tax in the state where you live if:
- Your employer is based in another state;
- You are working remotely;
- Your employer requires you to work remotely – you are not choosing to work remotely.
Given how complex employer convenience rules can be, we suggest contacting us. We can discuss your income tax returns if you’re in this situation.
3. States with No Income Tax
Some states don’t charge income tax on individuals. As of 2024, there are nine US states which don’t charge individual income tax:
- Alaska
- Florida
- New Hampshire (only taxes certain types of income)
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
There’s always the chance that this list will change. Our team can advise you on the most up-to-date tax information for your returns.
Do I Need to File Multiple Tax Returns?
It depends on if the states where you live and work have reciprocal tax agreements.
- Reciprocity agreements: You typically only need to file a single tax return.
- No reciprocity agreements: You may need to file two tax returns – one for where you live, and one for where you work.
The rules vary between states. There are many nuances involved. Our team can explain what tax returns and tax forms you must complete so you’re not penalized for tax return mistakes.
Will I Pay More Tax if I Live and Work in Different States?
You can’t be taxed on the same income twice. Instead, here’s what happens.
- You file a tax return for the state where you work.
- Then, you file a tax return for the state where you live.
- Your state of residence lets you claim a tax credit for tax paid to another state i.e. the state where you work.
There’s a risk that the credit won’t cover the full amount of tax paid in the state of employment. This is because income tax rates vary between states.
Do Remote Workers Pay Taxes Where They Live or Work?
Again, it depends on whether they work in states with reciprocal agreements. Remote worker tax returns can be very complicated, though, because they often work over multiple states. Rather than attempting to figure out your own tax liabilities in various states, let our team do the hard work for you!
File Your State Income Tax Returns with Confidence
Taxing income when you live and work in different states is challenging. If you’re unsure how to file your returns, don’t stress a moment longer. Instead, contact Innovative Tax Relief.
From tax preparation to financial planning, we can help you take control of your finances. As tax experts, we know how to handle even the most complex tax issues. We’ll help you avoid common filing mistakes and give you confidence in your tax returns.
Don’t let tax returns overwhelm or confuse you. Contact us now to schedule a free initial overview of your tax situation and get the peace of mind you deserve.
