There have been a lot of discussions lately on our Network regarding the Home State Tax vs the Work State Tax. Joseph Smith from TravelTax.com helps explain the Multi-state Tax.
Provided by: Joseph Smith at TravelTax.com
Paying Multi-state Taxes
Multi-state tax filings present one of the hardest parts of a travelers return and many travelers who start out on their first assignment are caught by surprise when they find they have to pay a large amount to their home state.
If you are from a state without an income tax, then you can skip this installment. This is for those that live in a state in which their home state tax is greater than the work state. First, let’s review what happens when you work in more than one state. Your home state will tax ALL of your income earned, regardless of where it was earned and how much time you spent in your home state. You will also be taxed in the work state. Thankfully, you are never doubled taxed as the home state will give you credit for taxes paid to the work state.
If your home state has a higher tax rate, you have a gap to fill.
There are at least 4 ways to fill this gap
1) Ask your agency to withholding for your work state AND additional amounts for your home state. Some agencies will outright refuse to do this as it requires additional work to add a second state. If they can, this is the fastest way to do it.
2) Make estimated payments. You can pay in during the year to bridge the gap. You would want to do this on a quarterly basis for each assignment that presents this dilemma. Find out the difference between your work state tax and the home state by either asking your tax professional or consulting the state tax guides.
3) If you have a job in your home state during the same year you have an assignment in a lower tax state, have the payroll manager increase your withholding for your home state. The excess will help soak up the deficit from the out of state assignment.
4) Just ignore it and pay at tax time. This last step is the easiest but also triggers additional charges. Additional charges?? When you do not pay enough DURING the year and run a deficit of more than 10% of your total tax, many state tax authorities will charge interest and/or penalties of the amount that should have been paid in to meet the 90% threshold. Some states charge as much as 10% of the amount due on a tax return with amounts due of greater than 10% of the total tax. What is “total tax”? When you complete your tax return, you are determining the tax on the income you earned. Once that tax is calculated, you then compare it to the amount you had withheld, paid in with estimates and/or credited from other state returns. The result is a refund or an amount due.
There are some exceptions to this system. Border states may have a reciprocity agreement and there is an odd agreement between IN, VA, CA, AZ and OR which we will cover later.
Joseph Smith presents a multitude of Tax related seminars both via Teleconference and at the Annual Travelers Conference. Consider attending one or check out the other Tax Related Articles for even more Travel Tax related information and advice.
