It’s Janice again. Thanks for answering my last question regarding what I should know as a new consultant. I’m writing to follow up and ask, what about taxes? I’ve heard a lot of different things about how taxes work as a traveling consultant. Can you clarify?
Hi Again Janice,
I’m so glad you’re writing in with another question; thank you! I’m more than happy to address the taxes issue because you’re absolutely right, there’s much disparate information out there and not all of it correct.
Let’s start with the general rule of thumb. If you are working a in a state other than where you primarily reside, state taxes are due in the state you work in. This is called a nonresident tax return. For example, if you live in Illinois, but work in California, you’ll owe state income taxes in California. The general rule to live by is, if you earn money in another state outside of the state you live in, you’ll owe income tax in that state.
A couple exceptions to this rule exist. If you live in a state that collects income tax, but work in a state that does not, you’ll owe income tax in your home state. For example, if you live in Illinois, but you are contracted and working in Texas, you will still owe Illinois state income tax even though Texas does not collect income tax. Bummer, I know. Similarly, if you live in a state that doesn’t collect income tax, but work in a state that does, you’ll still owe income tax in the state in which you’re working. Reversing our example, if you live in Texas and work in Illinois, you’ll be liable for Illinois state income tax. A really big bummer.
As an FYI, there are seven states without income tax – Alaska, Florida, Nevada, Texas, Washington State, Wyoming, and South Dakota. Tennessee and New Hampshire only tax interest and dividend income.
Finally, to make this even more complicated, there are some states that have reciprocity agreements between them, meaning if you live and work in states that have income tax reciprocity, you’ll owe tax in your home state no matter what. For example, if you live in Iowa and work in Illinois, you do not have to pay Illinois state income tax due to the agreement between these states. Lucky you!
All that being said, my recommendation to you Janice is to have your taxes prepared by a professional. I myself find taxes to be rather confusing and am adverse to the risk related to preparing them myself and facing a possible audit. I believe and recommend to every consultant I speak with to invest in having your taxes professionally prepared. If you do so, you can deduct the fees charged by your tax professional on your following year’s tax return. Good news.
I again wish you all the best in your new consulting career, Janice. If you have more questions, please feel free to write in or leave them in the Comments section!