June --
I have 14 yrs as a contract electrical engineer (electronic hardware designs).
You touched upon this topic at June's Blog but you didn't get into the detail I'm curious about. I am self employed and live in CT. For the first time, I might take a client company in the neighboring state (MA). For my previous long term client located here in CT, I worked from my home office and visited their facility (3 hrs round trip) maybe about 15 days out of a year.
If I work in a similar manner for a company out of state, what criteria should be used to determine how I report income to each state. Would I only report MA income for the days I traveled to MA, and the rest is CT income? Of course, the full income from this client would be reported on their 1099 showing they're an MA company, possibly without a CT facility.
Also, while hired under contract by a local office here in CT, I had to go to their corporate office in another state to work for a few weeks. I reported all income as CT income that year. Was that reasonable?
Brian
Windham, CT
Hello Brian,
All your net self-employed income -- and all your other income as well -- is taxable to the state in which you live. That's your "resident" state. In your case, Connecticut.
Here's how it works ... or here's what the non-resident states want you to do:
If you work in other states -- that means actually work there not just go there to pick up the work -- then you are working in a non-resident state. You must pay tax to the non-resident state on the income made in that state. If you pay income tax to the non-resident state you will get a credit on your resident state tax return for the tax paid to the non-resident state.
If your income can easily be identified as done in one state rather than the other, then allocate by actual income. Or, figure your income in each state by # of days worked to # of days worked in the non-resident state.
Here's an example:
As an engineer you grossed $100,000 self-employed income. $80,000 earned in resident state, CT; $20,000 was earned in non-resident state, MA.
You had $40,000 expenses which left you a net income of $60,000.
Since 20% of your gross income was from MA, then 20% of your net $12,000 is taxable to MA.
If your expenses were such that they could be easily identifiable to each state then your portioning of income would be actual rather than as a percent.
Best, June
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1 comment:
June,
Thank you for your help.
When you say...
"If your expenses were such that they could be easily identifiable to each
state then your portioning of income would be actual rather than as a
percent".
Sounds like you're saying if I have no expenses related to work I perform
for a job in a non-residential state (ignoring travel expenses for the
moment), I wouldn't have a deduction for income from that state.
Of course, all my business expenses are usually "generic" expenses (a new
printer, or software for instance), and those would be applicable to work
anywhere. That's where your percentage scenario applies. On the other hand,
if I purchase something specifically for a job out of state that wouldn't be used
for any other job in-state, that whole expense would be deducted only from
that out of state income.
If you think I'm misunderstanding something here, please advise. Otherwise,
if I don't hear back from you, I'll assume I've got the gist of it.
Thanks again,
--Brian
P.S. You are welcome to add this to June's blog if you would like.
Dear Brian,
You are correct. “Generic” expenses would be deducted proportionately to income. Specific expenses against that state’s income. Use common sense. In other words don’t fine tune $10 expenses but do properly allocate a $2,000 permit fee.
-- June
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