Multistate taxation refers to the process where businesses or individuals owe taxes in more than one U.S. state due to operations, sales, or income generated across state lines. It requires navigating varied state laws for income, sales, and franchise taxes based on having "nexus" (a taxable presence) in those jurisdictions.
If an employee works in more than one state, income tax might need to be withheld for multiple states. In fact, at times the employer might need to withhold income tax for multiple states from the wages of one employee.
For most taxpayers, Massachusetts has a flat income tax of 5 percent. In November 2022, Bay State voters approved an additional 4 percent tax on annual income above $1 million, beginning in tax year 2023. Annual income above $1 million (adjusted annually for inflation) is taxed at 9 percent.
Double taxation is not prohibited by the U.S. Constitution as long as it is not arbitrary, but most states help residents avoid double taxation via a variety of methods, including reciprocity agreements, allotment or apportionment rules, and credits for taxes paid to other states.
When you work remotely for an out-of-state company, you generally pay state income taxes where you live, but you might also need to file in the employer's state due to "convenience of the employer" rules in some states (like NY, PA, DE) or for corporate tax nexus, requiring you to understand both states' laws, claim tax credits to avoid double taxation, and ensure your employer correctly withholds taxes for your residence state. This situation also affects other employment laws like unemployment and workers' comp, so check with your HR department and state tax agencies.
To avoid double taxation, use "pass-through" business structures like LLCs or S Corporations where profits are taxed only once at the owner's individual rate, instead of C Corporations which are taxed at the corporate level and again on dividends; alternatively, C Corp owners can pay salaries, retain earnings strategically, or use income splitting, while international earners rely on foreign tax credits or treaty provisions.
If an employee works remotely in another state, the employee and the organization can be legally subject to the laws of that state. This could include state income tax, unemployment insurance, pay transparency laws, worker's compensation, mandated employee benefits, privacy laws and more.
The biggest tax mistakes people make include filing late, math errors, incorrect personal info (like Social Security numbers), forgetting deductions/credits (like EITC), misreporting income, not signing forms, and making errors with bank details for direct deposit, all leading to delays, penalties, or missed savings, with using tax software or professionals helping avoid these common pitfalls.
Establishing domicile involves demonstrating intent through actions such as changing your driver's license, voter registration, and primary banking relationships. 183-Day Rule: Many states apply a 183-day rule to determine statutory residency.
Massachusetts exempts Social Security, public pensions, veterans' benefits, and some private pensions from state income tax. Understanding these exemptions can help retirees, veterans, and beneficiaries plan their finances more effectively and reduce their overall tax burden.
Our MOA Opportunity Report Card, which uses the latest available Census Bureau data from 2023, gives Massachusetts a “C-” in taxes. Measuring total tax burden per capita, the Commonwealth also ranks 9th worst* in the nation.
Filing taxes for multiple states when you work across state lines
“The 6% tax will be owed to the other state, and California will allow a credit based on the lower amount of what was actually paid to that state or what California charges on that state's income.
Yes, you absolutely can own a house in one state while living in another, but it creates complexities with taxes, mortgages, and legal residency, requiring you to designate a primary residence (domicile) for tax purposes and navigate potential ancillary probate in the second state, with rental income often helping qualify for a mortgage on the new property.
However, the IRS will update taxpayer addresses maintained in IRS records by referring to data accumulated and maintained in the U.S. Postal Service's National Change of Address database. The rules allow notification to be made in several ways (see chart below).
Al Capone. A federal grand jury indicted notorious gangster Al Capone, leader of the Chicago Outfit crime syndicate, with 22 counts of tax evasion totaling over $200,000 in 1931 (equivalent to more $3.8 million today).
The good news is that federal law prohibits the same income from being taxed by two different states. So, if your work state doesn't have a reciprocal agreement with your home state, your home state will often allow you to claim a tax credit on your resident tax return for the taxes that you paid to your work state.
Managing multi state payroll is complex due to varying state tax codes, wage laws, and compliance requirements, which can lead to costly errors without a solid system in place.