If you spend large chunks of your working life on a plane, you may have a tax issue: The tax complexities of road warriors can be mind-numbingly complicated, and consultants, entertainers, motivational speakers and others who work in multiple states may not even realize where and what they owe.
"Road warriors need to look at where they are going, how often they are going, and what they are doing there," says Michael Bozimowski, a principal at accounting firm Rehmann in Farmington Hills, Michigan. "There is no good way to come up with a flat 'this is what you need to do' because the state rules are so variable."
As April 15th approaches, a lot of Americans are finishing up their federal tax returns. If federal taxes are complex, state ones are even more so. Each state has slightly different rules and regulations for who's considered a resident for tax purposes, who needs to file as a non-resident, and what constitutes working in that state.
Those complexities can trip up everyone from Madonna (who was tripped up by New York's residency rules in the 1990s) to frequent business travelers, telecommuters and entrepreneurs whose businesses may have inadvertently established residence in another state.
Related: The 10 Worst States for Taxes in 2014
More people face multi-state tax issues as the nature of business has changed, while a number of cash-pressed states continue to look for ways to ease their budget woes. If you work for a large company, and have multi-state tax issues, chances are that your W-2, which you received earlier this year, has already split your income into its various state pieces. If you have a W-2 that shows multiple states, you'll simply file state tax returns for each state listed. You can generally claim a credit on your resident state tax return for taxes paid to a state where you are not a resident.
Defining "Business"
If you're a one-person shop or an entrepreneur, you will need to understand the rules - or hire an accountant who does. At its most basic, if you do business in multiple states, you may need to file tax returns in those states. But there's that thorny question: What constitutes doing business in a state?
The answer is more art than science, and depends on details such as whether you signed a contract for new business in that state or whether you appeared in a television commercial filmed there. "If you're just going to a trade show, and you man the booth and schmooze with customers, and you're there for a few days or a week, nobody cares," says Daniel Morris, a senior partner at Morris + D'Angelo in San Jose, California. "But if you are regularly in the garment district, and you are constantly in the showrooms, then you have a different issue."
Whether it's complicated for you depends on your own specific situation. Someone who receives partnership income on a K-1 from an out-of-state partnership may need to file a state tax return in that state. A football player who travels to games all over the country would generally owe state tax for the income attributable to each state in which the games were played. And an entertainer who goes on the road for a theatrical production or concert, would typically owe taxes based on where those performances were held.
For creative folks, there's added complexity: If you receive residuals from a book or a film, the money will always be attributable to the state in which the work was produced, according to Andrew Blackman, a partner at Schulman Lobel Wolfson Zand Abruzzo Katzen & Blackman in New York. "I have clients with 25 W-2s on their returns, with maybe 10 different states," he says.
Related: The 10 Best States for Taxes in 2014
Blackman recalls telling a British actor who works on a popular American television show that he would have to keep track of not only days spent in the United States, but of days spent in each state, no matter how onerous that record-keeping might be. "I had a tough time explaining this," Blackman says. "He said, 'how do you keep up with this?' It's not just that there are multiple taxes to pay, but every jurisdiction has multiple rules."
In another case, Blackman says, a potential client who works for a television network and makes millions is trying to sort through the complexities of moving from California to New York mid-year, with resident and non-resident income from both locations. "There is so much to trap you," he says.
If you make a lot of money, of course, you're more likely to face an audit if you mess up on your tax reporting. But even if you income is more modest, you may still be playing audit roulette. As Morris says: "What are you going to say? Gee, it was too complex. That is not an excuse."
