Living in One State and Working in Another Income Tax: 10 Tips to Know
By Davis Clarkson , May 19 2021
During the pandemic, most employees are working from home, and some people will live in one state while working in another. While you may feel great about working from a home office, when tax time comes, it can bring a few headaches your way. You will have to figure out how do I file a tax return while living in one state and working in another and how do I handle income tax working in another state.
The difference between W2 and W4 forms is difficult enough to understand, but understanding state income tax working in another state is especially troublesome. This article will explore what's living in one state and working in another income tax regulations.
1. Understand the Laws Around Residency or Nonresidency
When it comes to living in one state and working in another income tax, you may be wondering: how do I handle income tax working in another state? And at the same time, how do I file a tax return while living in one state and working in another? The first step is you'll have to familiarize yourself with several terms that may determine which taxes you pay.
Residency refers to the state where you currently reside, and nonresidency means you're not staying in a specific state. For instance, if you're employed in a state but are not living there, you are considered a nonresident of that location. While this may seem straightforward, what would that mean when it comes to your state income tax when working in another state?
The definitions of residency and nonresidency differ between states, and there are different rules that determine how they apply to your taxes. The Supreme Court has also ruled in 2015 that no two states can tax the same income. As a result, when you are living in one state and working in another, income tax will likely be paid to the state you are employed in (the state you work in is likely going to be prioritized), while your state of residency will have to issue a tax credit of your income.
2. Check the State's 'First Day' Rule
The 'first day' rule applies to several states, which means that if you go to a state (that you don't reside in) and work there for one day, you'll have to pay them income taxes. States such as Delaware, Connecticut, and Massachusetts go by this rule. Other areas may have rules that state the same across a span of days, which is why it will be important to check whether you are covered by this rule before you need to pay your taxes.
3. See If Your States Have Reciprocity Agreements
How do I file a tax return while living in one state and working in another state? If you are worried about state income tax when working in another state, you will have to see the current existing reciprocity agreements, and whether they apply to you. A reciprocity agreement between two states will mean that residents of one state will not have to pay taxes for the state they work in.
This will save you the time and energy from having to file multiple tax returns. What you need to do in this situation is to let your employer know of this arrangement, and they will process the taxes for your home state only. If your state does not have a reciprocity agreement, you will have to file different tax returns, even if one of the states will eventually issue you a tax credit.
4. Research Your State's Waiting Period
Beyond a first-day rule, your state will also have a waiting period that refers to the amount of time you get to spend earning income before the state will start taxing your income. This will again differ according to the state, and some places such as Illinois, Arizona, and Hawaii don't tax workers who are in their state for visitation. However their waiting period looks like, you may still be required to file a tax return for that state.
5. Find Out Whether You Work in A Tax-Free State
In the US, there are several states that don't tax you at all, and this includes:
- New Hampshire
This means that you will have to pay taxes for the state that you reside in. As previously mentioned, the state you work in will be a priority, but if this is not an option, you will still be paying taxes for your state of residency. The way you receive your pay stubs will also differ according to state.
6. Know the Possible Tax Implications for Your Employer
You may be wondering how do I file a tax return while living in one state and working in another or how do I handle income tax working in another state, but the bigger question may be the implications for your employer. While the answer to how do I file a tax return while living in one state and working in another involves filing two tax returns, it may imply that your employer has a business presence in two locations.
This may result in them having to file a corporate tax return in your state of residency, too. The answer to how do I handle income tax working in another state varies along with the effects for your employer. Try to find out if this is the case with your state, and if so, let your employers know in advance so they will be aware of the proper tax procedures they will have to undergo.
Living in One State and Working in Another Income Tax Implications
The idea of a state income tax working in another state becomes blurred because of your arrangement. Some possible living in one state and working in another income tax implications include having to file multiple tax returns, having to research a lot more on what rules are in place that apply to you, and possibly causing tax implications for your employer.
One possible solution is to create a pay stub to organize your payroll. This helps you deal with questions such as how do I file a tax return while living in one state and working in another and how do I handle income tax working in another state. If you're looking for hassle-free options to reduce your workload, PayStubs.net is the answer. We will ensure you have fewer things to worry about by offering you ready-made templates for your needs.