Living in one state and working in another is increasingly common, especially with cross-border cities and remote or hybrid work models. However, it raises the complex question: what state taxes do I pay if I live in one state and work in another? Navigating dual-state taxation can be confusing, and mistakes can lead to penalties, double taxation, or underpayment.
If you work in New Jersey but live in Pennsylvania, or live in Texas but work remotely for a California company, your tax filing can look very different from someone working and living in the same jurisdiction. Residency rules, reciprocal agreements, tax credits, and nonresident forms all influence how much you owe and to whom.
This guide breaks down everything you need to know about what state taxes I pay if I live in one state and work in another, including legal requirements, residency definitions, filing obligations, deductions, and strategies to reduce tax liability.
What state taxes do I pay if I live in one state and work in another?
Generally, you pay income taxes to the state where you work and may also owe taxes to your home state. However, your resident state often provides a credit for taxes paid to another state to avoid double taxation. Some states have reciprocal agreements that allow you to pay taxes only to your home state.
Why State Taxes Are Complicated When Living and Working in Different States
State income tax obligations differ based on residency, employer location, and income source. When you ask what state taxes I pay if I live in one state and work in another, the answer depends on your legal domicile and the rules set by each state’s Department of Revenue.
Some states tax all income earned by residents, no matter where it originates. Others only tax income earned within their borders. If you’re a resident of State A but work in State B, you are generally taxed by both states: State A as your resident state, and State B as your work state. However, State A may allow a tax credit for income taxes paid to State B, which helps avoid double taxation.
The concept of “residency” also varies. States define residency using several tests, including domicile (your permanent home), statutory residency (based on time spent in-state), and intent (where you consider home). In some cases, even if you physically live in a different state, maintaining ties—like a home or voter registration—can keep you legally tied to your former state.
Reciprocity agreements between states allow residents of one state to request an exemption from withholding in another. For instance, residents of Illinois working in Iowa or Wisconsin can submit a form to avoid double taxation. Not all states participate in such agreements, making it essential to know the rules of both states.
Moreover, the situation becomes even more complex for remote workers. If you telecommute for a company in a different state, some states will still claim your income as taxable, especially if you work for a business with physical operations in that state.
Filing taxes in multiple states requires diligence. You’ll often file a nonresident return in the work state and a resident return in your home state. Understanding what state taxes I pay if I live in one state and work in another helps ensure compliance and minimize tax burdens.
When Do You Pay Taxes in Two States?
Living in one state and earning income in another can trigger tax obligations in both. Here’s when dual-state taxation applies and how to handle it.
Residency vs. Non-Residency: The Key Distinction
You are taxed as a resident where you live and as a nonresident where you work. Nonresidents only pay taxes on income earned within that state.
Understanding Reciprocal Agreements
These are agreements between states to simplify taxation. If your home and work states have one, you may only need to pay taxes to your resident state.
States Without Income Tax
If your home state (like Florida or Texas) has no income tax, but your work state does, you may still owe tax to the work state only.
Credits for Taxes Paid to Other States
Your home state often gives you a credit for taxes you’ve already paid to your work state. This avoids double taxation.
Part-Year and Full-Year Residency Rules
Moving mid-year can complicate things. You may need to file as a part-year resident in two states and track income earned in each.
How to Avoid Double Taxation When Living and Working in Different States
Avoiding double taxation is essential when your income crosses state lines. Fortunately, several strategies can help reduce or eliminate the risk of paying taxes twice on the same earnings. Here are key methods to stay compliant and minimize your tax burden:
- Claim a Tax Credit in Your Home State
Most states allow residents to claim a credit for income taxes paid to another state. This offsets what you owe and prevents duplicate taxation. - Leverage Reciprocal Agreements
If your home and work states have a reciprocity agreement, you can submit the necessary exemption form to avoid being taxed twice. - Track Your Work Locations
Maintain accurate records of where you worked each day. This is crucial if you travel frequently or telecommute across state borders. - File Both Required Tax Returns
Submit a nonresident return for your work state and a resident return for your home state to ensure full compliance. - Consult With Your Employer
Your HR or payroll department can help you understand withholding obligations and assist with proper form submissions. - Hire a Tax Professional
Multi-state tax filings can be complex. A tax advisor can help you optimize your filings and maximize your deductions.
What Happens If You Don’t File in Both States?
Failing to file correctly can trigger audits, penalties, and interest charges. Some people mistakenly file in only one state, assuming their taxes are complete. But many states match tax filings with employer reports and may pursue collection if you earned income there but didn’t file a return.
Also, if you owe taxes in the work state and fail to file, that state may intercept refunds, garnish wages, or add fees. Even if you’re getting a refund or owe nothing, you still must file to comply.
Being proactive about your tax obligations means you won’t face surprises. Start by determining your residency and understanding what each state expects of you. Always track your income by source and by state. Keep records of travel, remote workdays, and employment documents.
Using tools like tax calculators and state tax resources helps simplify the filing process. Ultimately, knowing what state taxes I pay if I live in one state and work in another saves time, stress, and potentially money.
What State Taxes Do I Pay If I Live in One State and Work in Another?
Remote work blurs state lines, but not tax rules. If you live in one state and work remotely for an employer in another, you may face dual taxation.
How Remote Work Affects State Taxation
Even if you work from home, the state where your employer is located might still tax your income.
Do Remote Employees Pay Taxes to Two States?
Sometimes, yes. If your employer’s state has a “convenience of the employer” rule, you could owe taxes there.
States With Aggressive Remote Work Tax Laws
New York, Pennsylvania, and Arkansas may impose taxes on remote workers based on employer location.
How to Avoid Tax Disputes as a Remote Worker
Keep logs of work location, maintain evidence of remote agreements, and consider working for a local employer if possible.
Best Practices for Remote Employee Tax Compliance
Hire a tax advisor, read employer policies, and understand both states’ tax codes to stay compliant.
Conclusion
what state taxes do I pay if I live in one state and work in another is essential for legal compliance and financial health. The answer is rarely simple and depends on residency status, reciprocal agreements, tax credits, and the nature of your employment.
By taking steps to file correctly and reduce unnecessary payments, you can protect yourself from penalties and maximize your income. Stay informed, consult with professionals, and use official state guidelines to handle your tax situation with confidence.
FAQ’s
What if my state doesn’t have income tax?
You’ll still owe state taxes where you earn income. For instance, living in Texas (no income tax) but working in California means paying California state tax on your wages.
Do I need to file tax returns in both states?
In most cases, yes. You’ll file a nonresident return for the work state and a resident return for your home state to properly report and credit your income.
What are reciprocal agreements?
These are agreements between certain states allowing you to pay income tax only to your home state, simplifying filing and avoiding dual state taxation.
How do I know if my states have reciprocity?
Check with your employer or visit your state’s Department of Revenue site. If reciprocity exists, you’ll likely need to submit a special exemption form.
Can remote work cause tax issues between states?
Yes, especially in states like New York or Arkansas, which tax based on the employer’s location. This can lead to double taxation if not properly managed with credits or exemptions.
