Balancing the Books

« Back to Home

Working Remotely? Why Crossing State Lines Can Be Tax Trouble

Posted on

Do you want to work remotely but live across state borders from your employer? While a few miles over a border might not seem like a big deal in real life, it can have a serious impact when it comes to income taxation. In fact, you could end up paying taxes in both states. How can you avoid this? Here's what you need to know.

How Location Affects Taxes

While federal income taxes are the same for all 50 states, these states each have their own methods of taxation to pay their own bills. In most states, this includes income tax for those working within their state — not just residents of that state. So if your employer is in one state but you are a resident of the next, you could conceivably have to file and pay taxes in both. 

When you work in a different state than your employer, you likely would see this reflected in the state tax section of your Form W-2. Because the employer must report your work in each state, you could see more than one listed on this form. The employer may also have to register with your home state, report your earnings, and pay any related insurance or taxes. 

How You Can Avoid Tax Issues

The best place to start if you want to avoid double taxation is with an experienced tax preparer. Filing in two or more states is complex and generally shouldn't be attempted on your own.

Many states use a credit system where you can claim taxes paid in other states as a credit in your home state. Depending on each state's tax system, you could end up owing more or less in one state. Some states have additional rules about claiming this credit depending on whether you are working at home for your convenience or at the employer's mandate. 

If you can't avoid double taxation through credits, you may want to consider a more comprehensive solution. You and your employer may be able to avoid both party's financial and reporting burdens by renting an office space within the company's home state borders, for instance. Your remote position may also qualify — with some modifications — to be managed as an independent contractor. 

What You Should Do Now

The sooner you consult with a tax professional like Hough & Co CPA, the smoother this transition will be. Learn more today about multi-state employment issues by making an appointment with an accountant familiar with both states.