Overview

Multistate income tax matters whenever you live, work, or sell in more than one state. States use residency tests, source rules, and apportionment formulas to decide what portion of your income they can tax. Getting allocation right reduces the chance of double taxation, unexpected bills, or audits.

Key principles

  • Residency vs. nonresident sourcing: States tax residents on worldwide income and nonresidents on income sourced to the state. Each state defines residency differently (domicile, statutory days, or other tests).
  • Sourcing rules by income type: Wages are often sourced to where services were performed; business income may be sourced by receipts, property, or payroll factors depending on state law.
  • Apportionment formulas: Businesses commonly use formulas (single‑factor sales or a weighted three‑factor approach: sales, property, payroll) to apportion multistate business income among states.

How to allocate income—step by step

  1. Determine residency status for each state involved. Residency determines whether you file as a resident, part‑year resident, or nonresident. (See state rules for specifics.)
  2. Categorize income: wages, business/net self‑employment, rental, and investment income can have different sourcing rules.
  3. Apply state sourcing rules: for wages, allocate by where the work was physically performed or where the payor is located, depending on the state. For business income, use the state’s apportionment method (e.g., sales factor).
  4. Calculate apportionment percentages for businesses: typically sales in the state ÷ total sales, possibly combined with payroll and property factors.
  5. File the appropriate resident, part‑year, or nonresident returns and claim credits for taxes paid to other states on your resident return to avoid double taxation.

Practical examples

  • Remote employee: If you live in Pennsylvania and perform services from home for a New York employer, New York may tax income for days you perform services for New York clients or physically perform work there—rules vary by state. Track days worked for each state.
  • Small consultancy: I worked with a consultant who lived in New Jersey and billed clients in New York and New Jersey. We used a sales‑factor approach for portions derived from client locations and ensured a credit was claimed on the NJ resident return for taxes paid to NY (based on NJ rules). In my practice, accurate time and client‑location logs prevented a residency audit.

Who is affected

  • Remote employees who cross state lines or serve clients in other states.
  • Part‑year residents who moved midyear.
  • Businesses with customers, employees, property, or sales in multiple states.

Common mistakes to avoid

  • Relying only on employer withholding and not filing required nonresident returns.
  • Mis‑sourcing remote work (not tracking days or client locations).
  • Forgetting to claim tax credits for taxes paid to other states or misunderstanding how credits are calculated.

Professional tips

  • Keep contemporaneous records: days worked in each state, client billing locations, travel logs, and sales receipts.
  • Adjust withholding or estimated payments when you have multistate income to avoid underpayment penalties.
  • Review state apportionment rules annually—many states adopted single‑factor sales apportionment, but exceptions exist.
  • For businesses, review nexus and filing thresholds: sales tax and income tax nexus rules differ and can trigger filing requirements.
  • Consult a tax professional when moving, adding remote staff, or expanding into new states—small facts can change filing obligations.

Avoiding double taxation

Most resident states provide a credit for taxes paid to other states on the same income; the credit calculation and allowed amount vary by state. Correct allocation and credit claims are the standard way to reduce or eliminate double taxation.

Resources and further reading

Professional disclaimer

This article is educational and does not constitute individualized tax advice. State rules change and are fact‑specific. Consult a qualified tax advisor or state tax agency for guidance tailored to your situation.

Authoritative sources cited: Multistate Tax Commission; Internal Revenue Service; state revenue departments (varies by state).