Multi-State and Local Tax

Federal tax is one system. State tax is fifty-one of them, plus cities, counties and school districts that tax income on their own. Multi-state and local tax work answers a question that has no simple answer: which governments can tax this person or business, and what has to be filed for each? It matters to remote workers whose employer sits in another state, landlords with out-of-state rentals, owners who sell or hire across state lines, and families who moved during the year.

Where multi-state tax comes from

Nexus is a connection between you and a state that lets the state tax you. For income tax, nexus usually comes from physical presence such as an employee, an office, inventory or property, and from income sourced to the state. For sales tax, the U.S. Supreme Court's 2018 South Dakota v. Wayfair decision allows states to require out-of-state sellers to collect tax based on their economic activity, not just physical presence. Our sales tax service covers that separately.

A federal law, Public Law 86-272, limits state income taxes on out-of-state businesses whose only in-state activity is soliciting orders. Its protection is narrow, it does not cover most services, and federal legislation affecting it has been in the news, so we confirm the current position before relying on it.

For individuals

• Residents and nonresidents. Your state of residence taxes your worldwide income. Other states tax income sourced to them, such as wages for work done there, rent from property there and business income earned there.
• Credit for tax paid to other states. Your home state usually allows a credit on the resident return for tax paid to another state on the same income. The credit is generally limited to what the home state would have charged, so a higher-tax neighbor can leave you with a net cost.
• Part-year returns. Moving in or out of Illinois, or between any two states, means each state taxes only part of the year, and splitting income and deductions correctly takes care.
• Remote work. In most states, where you physically work decides where wage income is sourced. A few states apply a "convenience of the employer" rule that can tax work done at home for an in-state employer. Some neighboring states also have reciprocal agreements that let residents work across the border and pay only their home state.
• States without wage tax. Texas and Florida do not tax wages, which changes planning for people who relocate. A move only helps if residency actually changes. See Texas and Florida.

For businesses and owners

• Apportionment. A business with income in several states divides it among them by a formula, and the formula differs by state. Many weight sales more heavily or use sales alone.
• Owners of pass-through entities. A partnership or S corporation with Illinois activity may need to withhold for nonresident owners unless they provide Form IL-1000-E or the entity elects to pay the PTE tax. Illinois' PTE tax is 4.95% of the entity's net income, elected on Form IL-1065 or IL-1120-ST each year, and the election cannot be undone after the extended due date. Owners get a credit for their share. Many other states have their own entity-level taxes with different rates and rules. Whether it saves money depends on the owners' federal position, including the limit on the state and local tax deduction.
• Registration and franchise taxes. Doing business in a state often requires registering with the state and paying minimum or franchise taxes, even when there is no income.
• Local taxes. Some places tax wages or net profits at the city or county level, including Ohio municipalities, Pennsylvania municipalities and school districts, New York City, Maryland counties and Indiana counties. Withholding on employees is covered by our payroll services and the guide on local payroll taxes.

How an engagement works

1. Consultation. We map your footprint: where owners live and work, where employees, property, inventory and customers are.
2. Written engagement agreement listing the states and returns in scope and how fees are determined. We do not begin until it is signed.
3. Document collection: payroll registers by state, a list of locations, ownership and K-1 detail, sales by state, property records and any notices.
4. Analysis and preparation. We test nexus state by state, prepare the returns and credits, and flag missing registrations.
5. Review and delivery, with a filing matrix showing each state, each return and what is due when.
6. Follow-up. We update the matrix when facts change, such as a new employee in a new state.

Problems we commonly fix

• A remote employee moved to another state and the employer never registered for withholding or unemployment insurance there.
• Rental property or a partnership interest in another state with no nonresident return filed.
• An S corporation with operations in several states, but owners who receive no state-by-state income information.
• Notices from a state about unfiled returns. In many states the time limit for assessment does not start until a return is filed, so the exposure can stay open for years.

When a state exposure is found, there are often options. States run voluntary disclosure programs that can limit how many past years are reviewed, and the Multistate Tax Commission operates a multistate program for businesses. We evaluate those options with you before any contact with a state. For notices already received, see state tax notices and representation.

How we can help

We work with clients whose lives and businesses cross state lines, from Naperville and Aurora to every other state, in person or remotely. Because we also prepare the individual and business returns, the state sourcing agrees with the federal numbers. Start with the Illinois page or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.