Why multistate income matters

Earning income across state lines is commonplace now: remote work, gig platforms, contractors, and businesses with out‑of‑state customers create multistate tax exposure. States generally tax residents on all income (worldwide) and nonresidents on income sourced to the state. That overlap — when two states claim the same income — can lead to double taxation without careful planning and correct filing.

In my 15+ years advising taxpayers, I’ve seen common patterns: remote employees taxed by the employer’s state, consultants paying multiple nonresident returns, and small businesses struggling with apportionment. Most double taxation issues are avoidable if you follow three foundational steps: determine residency, source and document income, and claim available credits.

Sources and further reading: see the IRS for federal interactions (irs.gov) and the Tax Foundation for state rule comparisons (taxfoundation.org).

How states tax residents vs. nonresidents (quick primer)

  • Resident state: usually taxes your worldwide income. Residency tests vary: domicile (where you intend to return) and statutory days (often 183 days) are common tests.
  • Nonresident state: taxes only income sourced to that state (wages performed in the state, rental income from property in the state, business income apportioned to the state).
  • Part‑year resident: taxed as a resident for the portion of the year you lived in the state and as a nonresident for the remainder.

Because of these rules, you could easily have the same wages claimed by two states — the resident state taxing worldwide income and the work state taxing wages earned there.

Common ways double taxation appears

  • A remote employee lives in State A but physically performs work in State B for several weeks. Both states claim the earnings for those days.
  • A consultant performs services in multiple states and files multiple nonresident returns, each assessing tax on the portion of income sourced to that state.
  • A business with sales, property, or payroll in several states must apportion income based on each state’s formula and may face multiple tax filings.

Practical strategies to avoid double taxation

  1. Confirm your residency and document it
  • Residency determines primary taxing rights. Gather proof of domicile: driver’s license, voter registration, primary home ownership, utility bills, and where you spend the majority of time.
  • If you’re changing states, keep dated records (moving receipts, lease start/end dates). States scrutinize moves that appear tax‑motivated.
  1. Identify sourced income precisely
  • Wage income is typically sourced to the state where the work is physically performed. For businesses, state law governs apportionment formulas (sales, payroll, property).
  • Keep detailed timesheets or travel logs showing where work was performed — this is essential when a state audits the origin of wages.
  1. File the correct returns: resident, nonresident, or part‑year
  • File a resident return in the state where you’re domiciled (even if you earned income elsewhere).
  • If you worked in other states, file nonresident returns there for income sourced to those states. Many states offer online nonresident forms with schedules to calculate taxable income.
  1. Claim credits for taxes paid to other states
  • Most states give residents a credit for income taxes paid to another state on the same income to prevent double taxation. The credit generally equals the tax paid to the other state, limited to the resident state’s tax on that same income.
  • Carefully compute this credit: it’s usually claimed on your resident state return and requires attaching the other state’s tax return or a credit schedule.
  1. Use reciprocal agreements where available
  • Neighboring states sometimes have reciprocity for wage income (e.g., you live in State A but commute to State B — you may be able to file only with your resident state). Check the neighboring state revenue department for reciprocal agreements.
  1. Review employer withholding and ask for adjustments
  • If your employer withholds for the wrong state, request a withholding change and track the withheld amounts. You may need to file for refund from the state that withheld or claim credits on your resident return.
  1. For businesses: understand nexus and apportionment
  • Nexus rules determine whether a business must file in a state. If you have sufficient presence (sales, payroll, property), you’ll need to apportion income using the state’s formula.
  • Apportionment can be complex: some states use single sales factor, others use a three‑factor formula. Carefully allocate receipts and payroll to each state.
  1. Consider professional help for complex situations
  • When multiple states, large amounts, or corporate apportionment are involved, a tax professional reduces audit risk and can identify planning opportunities.

Examples (realistic, anonymized)

  • W-2 employee living in New Jersey but working in New York: New Jersey residents generally claim a credit for New York tax paid on the New Jersey return to avoid double taxation. New York also applies a “convenience of the employer” rule in certain situations — meaning remote work performed for personal convenience may still be taxed by New York (see New York State guidance: https://www.tax.ny.gov).

  • Freelance designer with clients across states: The designer files nonresident returns in states where they meet filing thresholds, keeps invoices tied to client location, and claims credits in the home state for taxes paid to other states. Documenting the location where services were performed (home office vs. client site) was the deciding factor in an audit.

  • Small business with multistate activity: The owner studied each state’s apportionment formula, tracked sales by state, and adjusted pricing for nexus‑triggering activities. That record‑keeping simplified quarterly estimated payments and minimized surprises at year‑end.

Audit triggers and common mistakes to avoid

  • Ignoring nonresident filing requirements and hoping it will go unnoticed. States routinely match W‑2s and 1099s against filed returns.
  • Failing to keep daily work location records. Without contemporaneous documentation, states may allocate wages to the taxing state.
  • Over‑claiming credits or using inappropriate income items as the basis for credits. Credits typically apply only to the same income taxed by the other state.
  • Assuming a move is automatic: domicile is a fact‑intensive test. Merely signing a lease or spending a few nights in a new state won’t always change domicile.

Practical checklist before filing

  • Confirm domicile and residency status for the tax year.
  • Reconcile W‑2s/1099s and ensure state withholding matches work performed.
  • Compile time logs or travel records documenting where services were provided.
  • Prepare nonresident returns for each state where income was sourced.
  • Claim resident credits on your home state return, attaching required documentation.
  • Adjust estimated payments for multistate tax exposure to avoid underpayment penalties.

Useful resources and references

Internal resources on FinHelp.io

When double taxation is legitimate and what to do

Sometimes apparent double taxation is temporary: you may pay tax to a work state and then later receive a credit on your resident return. True, permanent double taxation is rare because most states provide credits or reciprocity. If you believe both states are improperly taxing the same income after you’ve claimed credits, you can:

  • Request an amended return in the taxing state if you filed incorrectly.
  • File an appeal with the state tax agency and provide contemporaneous records.
  • Consider a protective refund claim while you gather evidence.

Final thoughts and professional advice

Multistate income increases complexity but is manageable with disciplined documentation and the right filings. In my practice I emphasize three behaviors that prevent most problems: track work location daily, reconcile employer withholding early, and consult a state tax specialist when multiple states or business apportionment apply.

This article is educational and does not replace personalized tax advice. For complex multistate situations, consult a licensed CPA or attorney who specializes in state taxation.

Sources: Internal Revenue Service (IRS), New York State Department of Taxation and Finance, Tax Foundation. Additional state guidance should be obtained from the respective department of revenue or tax agency.