How Is Out-of-State Income Taxed?


Map of Eastern US with red pin on New JerseyUnderstanding who you pay your taxes to seems pretty simple: you pay both the federal and your local state government. While this may be true for many people, for those who earn income in multiple states, understanding who you’re supposed to report your income to can get complicated pretty quickly. If you earn income in another state, do you have to pay taxes to that state? Will your state of residence still tax the income? What about products sold online to customers in other states? Keep reading to learn more about how out-of-state income is taxed, and contact us to get expert guidance on handling this complex tax situation.

Income Is Taxed in the State Where It Is Earned

The first key thing that cross-country earners need to understand is that income is taxed in the state where you earned it. This means that the work was physically performed in or the product was provided within the borders of that state. So, if you’re like many New Jersey residents who commute into New York for work, the income you earn in the State of New York is subject to that state’s income tax. If you have a second job in New Jersey, where you live, then the income from that job would only be subject to New Jersey’s taxes.

Why do we say “only”? That leads us to our next point.

Your State of Residence Will Also Tax Your Out-of-State Income

Before you let the panic set in from reading that header, it’s important to note that you will receive a tax credit on your state tax forms for any out-of-state income taxes that you paid in New York (or any other state for that matter). Essentially, you’ll write in the amount you paid to other states for income tax earned there, and the State of New Jersey will provide you with a tax credit equal to that amount. This does, more or less, ensure that you aren’t double-taxed on that income; however, it also adds some extra work and new complexities to your state income tax forms.

It’s also worth noting that, because states have different tax rates, you may still be taxed on at least a portion of your out-of-state income. In other cases, the state you earned in may not have a state income tax at all. Texas is one such example. So, if you traveled to Texas during the summer for some contract work and earned income there, the State of Texas would not tax your income—but the State of New Jersey would. Because you did not pay any state taxes on that income, you would not have a tax credit on your return, and you would have to pay taxes to New Jersey for the full amount of income earned in Texas.

How State Taxes Impact Online Sellers

Many businesses—especially small businesses and solopreneurs—provide services and products almost exclusively online. In our tech-based world, having a brick-and-mortar location is becoming more and more optional, and opens up opportunities to reach customers across the entire country, and even around the world. But do you need to worry about out-of-state taxes when selling to out-of-state customers?

If the idea of having to track the state of residency for every customer you sell to online is giving you a headache, don’t worry: it’s not required. Taxes for online income are based on the state where the order was actually fulfilled. So, if you sell handmade goods online, and you make and ship everything from your state of residence, then you would only pay income taxes for your state. However, things get more complicated if you have multiple fulfillment centers.

You might be thinking, “Well, I don’t have multiple business locations, so I’m fine,” but this may not be true. For example, many vendors sell their products on Amazon. Even if you’re still making these products at home, if they’re shipping from an Amazon fulfillment center in another state, the orders are technically being fulfilled there, and that state would impose their own income tax for all orders shipped out of that center.

We Can Help You Handle Filing Multiple State Returns

If you’ve earned income that’s subject to taxes in multiple states, the experts at Demian & Company CPAs can help. Our tax professionals are experienced in handling income earned outside the state of New Jersey, particularly for those clients who cross into New York for work each day. Contact us and schedule a consultation to get the answers and support you need in navigating out-of-state income tax.