If you live in one state and practice in another—for instance, by providing clients remote therapy sessions—your taxes will be impacted.

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As states search for new ways to expand their tax bases, some are increasingly redefining the definition of “doing business” in the state, which is used to determine when a business is required to file a corporate income tax return. Failure to keep up with these changes may lead to unexpected tax liability, interest and penalties.

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The threshold issue for any business operating in more than one state is determining the states in which it must file returns and pay income tax, which is determined by examining all the contacts between a business and a state i.e. “nexus”. 

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Generally, having customers in multiple states is a good thing, but not the case from a tax perspective, where we typically want to minimize the number of states in which they must file returns and pay income tax. 

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Fortunately, the U.S. Constitution protects against overreaching state taxation to provide a level of uniformity among the various states’ tax laws by governing nexus determinations in all 50 states. 

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Telemedicine creates state income tax issues for employees as well as state payroll withholding tax and corporate income tax issues for their employers. The compensation of such employees may be subject to tax in both the state in which the employee resides and the state in which the employee works. 

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Consequently, an employer must track all of the work locations of its employees to satisfy its withholding tax obligations. Even if an employer does not withhold tax in a state in which an employee is working, the employee may still have a tax obligation in that state. Although the state in which an employee resides will generally allow the employee to claim a credit for income taxes paid to other states, the credit may not be sufficient to completely eliminate any double taxation. 

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Telecommuting employees also expose employers to the possibility of corporate income tax nexus and a sales tax collection obligation in the states in which the employees are working.

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As a result of the pandemic, many employers hit with government orders and public health recommendations implemented work-from-home requirements for their employees in response. 

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Numerous states responded by providing temporary relief for certain adverse tax consequences of employees working remotely due to the COVID-19 pandemic. 

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Employers were suddenly strapped with withholding tax obligations on their newly relocated employees. Moreover, a number of states have statutes or regulations that require a corporation to file an income or franchise tax return and pay tax if the corporation has the authority to do business in the state.

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Tip: Research "reciprocal agreements" in your state. Reciprocal agreements allow you to work in a neighboring state without having to pay taxes there, and are in place for certain states. For example, California residents do not need to pay income tax on wages they earn in Arizona. Information on reciprocal agreements and any tax forms needed for exemption can be found on your respective state’s website. (Note: reciprocal agreements only apply to wages from employment. If you're receiving income from a different state outside of employment, you'll need to file a non-resident return.)

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Did you move recently or are you considering moving? Read our article on how moving to a different state impacts your taxes as a therapist.

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‍This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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