Dear Rich,

As a contract worker, I might perform work in several states over the course of a year, and I'm wondering how to handle the different state income taxes. Are there time limits on how long you can work in a state before you are liable for its tax?

Is there a legal way to treat income as if it has been paid to you in your home state, even if you do the work elsewhere?

A permanent employee who travels for work typically doesn't pay income tax in the states he goes to -- is there an analogous situation for a contract worker? For example, what if you work for an agency and have it pay you in your home state while you are working elsewhere?

-- Multi-stater

Dear Multi-stater,
I don't have a simple answer for you.

The United States and the state where you reside will impose income tax on your worldwide income. In order for any other state (a "nonresident state") to tax your income, there must be "nexus" (a connection) between the source of income and that state.

If you have property in a state where you don't reside, then clearly that state can tax the income from the property. That's why you have to file a nonresident income tax return when you have a rental building in another state.

If you perform services that are connected to another state, the question becomes more difficult. If you physically perform services in another state, there is a connection. But how much?

I am not aware of any minimums on the number of days that you perform services or on the dollar amount of your income that would exempt you from paying taxes in another state. The question really is how to figure the amount of income that you need to pay taxes on in that state.

In the case of salaried professional athletes, some states like California and Colorado use the ratio of instate duty days (days for which you are paid) to total duty days. Other states like Massachusetts use the ratio of games played instate over the total games played to allocate the salary. Still other states like Virginia used a hybrid method. If the pay can be traced to a specific game or event, e.g. a playoff game or a concert, then the income is sourced to where that game or event occurred. Otherwise the income is sourced based on duty days. Other states like Maine attempt to tax the income if it can be sourced to a specific location where the services were performed.

The only answer I can give you is to check the rules in each state where you physically perform any services. If you are physically there, you have to deal with the issue. The place where you are paid doesn't affect the question of whether services were performed in the state.

Employers have a worse problem. They have to withhold state income taxes as well as report the income. If an employee works in more than one state, they should prepare a Form W-2 that shows the income and state income tax withholding for each state in which the employee performed services.

Richard Hellmold

an attorney and CPA specializing in income taxation and estate and gift tax planning. He is a member of the Massachusetts Society of Certified Public Accountants and its Federal Taxation Committee.

Email: Rich Hellmold