Multi-State W2s: Taking Credit for Work State Taxes
Filing taxes can be tricky for production workers—especially if you work in multiple states throughout the year. How do you know which states you owe taxes in? Is it possible to have to file in more than one state? And what documents do you need to file?
While the questions are simple, the answers are complicated. Why? Each state has different requirements for taxing (or not taxing) residents and has unique rules about taxing (or not taxing) nonresidents who work in their state. As a result, the steps you need to take to file accurately can take a little investigative work to pin down.
A common production crew filing mistake to watch for
Sometimes, production workers can receive incorrect guidance from tax preparers, which leads to extra taxes being paid at tax filing. Most commonly, this happens when the worker is encouraged to fill out the wrong tax form. Why does this happen?
Many tax preparers are not familiar with how multi-state taxation applies to entertainment industry workers. As a result, a tax prep specialist may recommend you fill out the EZ form when you file your taxes. However, if you do this, important information may be missing from your state return! For example, you may not fill out an entry that lets you take credit for taxes paid in another state.
Multi-state tax basics
Let’s start by defining the two most common types of personal income state tax returns:
- Resident tax return: Filed by residents in states that have personal income taxes.
- Nonresident tax return: Filed by nonresidents in states that tax personal income.
If you work in multiple states in a single year, you may also have to file taxes in multiple states. This can especially be true if you live in a different state than the state or states you work in.
So how do you determine if you’re a resident or nonresident?
From a state tax perspective, the term "resident" typically refers to an individual who meets specific criteria. Each state has its own rules and guidelines for determining residency status, but there are a few common factors that states use to determine residency, including:
- Domicile: A person's domicile is their permanent home or principal place of residence.
- Physical presence: Many states consider the number of days an individual spends within the state's borders as a factor in determining residency. Some have a "residency test" that looks at the number of days spent in the state during the tax year to determine when you hit ‘resident’ status.
- Permanent place of abode: Some states consider whether the taxpayer has a permanent ‘place of abode’ within state borders. This can sometimes establish residency even if the owner spends significant time outside of the state.
- Driver's license and voter registration: Having a driver's license or being registered to vote in a particular state may also be taken into account in determining residency.
- Business and employment ties: If an individual has significant business interests or is employed within a state, it may impact their residency status.
Each state’s residency rules vary, so it’s a good idea to verify how residency is determined in states where you may have tax obligations. You can do this by checking with the local tax authority or by consulting a tax professional. If you don’t meet any of the above criteria but worked in a state, you’re considered a nonresident of that state.
Differentiating Between Resident and Nonresident Tax Forms
In most states, the personal income state tax form you submit as a resident and the personal income state tax form you submit as a nonresident have the same number but a slightly different form name.
Some personal state nonresident income tax forms include a question that prompts you to indicate the number of days you worked in the state, whereas others require you to submit a separate form. For example, in New York, you have to submit an additional tax form to report the number of days you worked in the state.
Figuring Out Where to File State Income Tax Returns
The basic rules of when to file a state income tax return are simple. You must file:
- If you receive a W2 with state taxes recorded in box 15, or
- If you reside in a state that taxes personal income
Of course, there are some caveats, which I’ll explain below.
States with No Personal Income Tax:
The following states don’t tax personal income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you don’t need to file a personal tax return with your state; you only have to file a federal one. However, if you live in one of the states listed above but work in a state that does tax personal income, you’ll see nonresident state income tax withholding on your pay stub and will need to file a personal, nonresident tax return in your work state.
States with Reciprocity:
Some states have what’s called a reciprocity agreement with another state or states. This agreement allows a resident from one state to work in another specific state, and the employer only withholds income taxes from the resident state (where the employee lives). Which means you only file a personal tax return in your resident state, no need to file a non resident tax return in the work state.
If you work in a state with a reciprocity agreement with your resident state, you must fill out a form declaring you are requesting reciprocity. For example, Arizona has reciprocity agreements with California, Indiana, Oregon, and Virginia.
Sixteen resident states currently have reciprocity agreements with at least one other state, including Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, Washington DC, West Virginia, and Wisconsin.
Reciprocity can be extra confusing because there are often exceptions for productions utilizing film incentive credits. Some state film incentives require states to withhold tax to be eligible to earn a film incentive credit, even if an individual would typically earn a credit due to a reciprocity agreement with their resident state. If this situation applies to you, it can make your filing process a bit more complex. When in doubt, consult with a tax expert.
Understanding State Tax Withholding Recorded on Your Pay Stub
You may notice that sometimes your paycheck will have both your work state and resident state taxes withheld.
There are two reasons this may be the case:
- Your resident state is a high-tax state, and your work state is a low-tax state.
If this happens, you’ll owe the difference to your resident state (up to a pre-determined limit).
- Your resident state does not allow credit for other states’ withholding.
A handful of resident states that have reciprocal agreements (which are different than credits) don’t allow you to credit other state withholding. For example, if you’re an Ohio resident and worked in Indiana—which has reciprocity with Ohio—you may not claim credit for taxes paid to Indiana.
Preparing to File State Taxes
Now you understand multi-state W2 basics. So, what steps can you take to make sure you’re filing the right forms, paying taxes in the right states, and getting credit for taxes paid when working in multiple states in a single year?
Verify the following as you prepare to file your taxes:
- Make sure you’re using the right copy of your W2 form.
- Use the right income tax form.
- Use the right work state personal income tax form. Confirm whether you need to fill out a resident or nonresident form.
- Verify your work and resident states’ reciprocity status. Determine if you worked in a state that has reciprocity with your resident state and file reciprocity election forms accordingly.
- Communicate about film credits. If you had withholding in a state because of the film credit, be sure to tell your tax preparer.
A number of factors—including your deductions and your spouse's income—can impact how things shake out when you file, and simple mistakes—like the ones we covered above, can be costly. That’s why, in addition to double-checking all the items outlined above, it’s smart to consult with a tax expert anytime you take a new job. They can help you determine the best withholdings to choose in order to make sure you get a refund, not a tax bill.
Now that you’re aware of common issues that impact production workers, you know what to watch for and what questions to ask. Taking a proactive role in managing your tax situation by following the steps outlined above and working with a well-informed tax preparer will help ensure that your multi-state taxes are filed correctly. If you’re an EP customer, you can always contact firstname.lastname@example.org with questions. We’re here to help you make sure you get the appropriate credits and that your taxes are filed accurately—no matter how many states you worked in.
This blog contains general information we are providing on a subject that may be of interest to you. Nothing in this blog should be considered tax advice. You should consult with your tax or legal advisors regarding the applicability of any of these rules to your specific circumstances and how best to handle them.