You live in your home state. You work from home, but suddenly another state says you owe them taxes. What do you do in that case? Here’s a real life study of one of my clients and how we juggled 3 states to find the best, legal solution for him.
Live in NJ, Work in NY, Biz in FL
A client of mine lived in New Jersey and commuted to a W-2 job in New York City. He was a computer guy. In his spare time, he discovered a nice little niche in Florida. He put up websites, set up a call center and started making online sales in Florida.
When the income became significant, he paid for a consultation with me. He had some very specific questions about nexus. Where should his company be located? Where does he have to pay tax? Florida? New York? New Jersey? All three?
The work clearly was done in Florida. The customers were in Florida and the fulfillment of the services was in Florida. So, he needed a Florida entity. Florida doesn’t have a state income tax, so at first pass, it might seem like he’s getting away with no tax.
He lives in New Jersey and had, until recently, worked in New York. He did the entire computer programming for the FL business from NJ.
Since he lived in and worked on the business in New Jersey (NJ), he also had NJ nexus for the business. If he didn’t do any work in NJ, he still would have had pay NJ income tax if the Florida (FL) business were a flow-through entity like an S Corporation. Since he worked on the business in NJ, he may have to additionally register his company in NJ. In his case, he did not. But it’s a question you may need to explore for your own situation if you’re working online for your business that is located in another state.
He also wondered if he would have to pay New York (NY) tax on the income he earned from his business. The answer to this was “no.” He had NY tax on the income he earned in NY while he lived in NJ, but that was because he actually worked in NY. In this case, the nexus for the business is just between NJ and FL. There will be no NY tax on business income.
Once he started working from home in NJ for his NY W-2 job, it became a little more complicated. Luckily NJ and NY have an agreement for workers working from home. Other states may both want to tax the individual and the corporation. That’s a problem we’re going to see more of starting in 2020 and beyond. If you worked from home in 2020 and the business was in another state, check to see what agreements your home state and business state have. Hopefully, they’ve already worked out what’s taxable and what’s not.
Nexus is complicated. In most cases, you just need to break down – where is the work done? Where do the sales happen?
WHERE should the business be set up? That’s just one of the topics we talk about when we consider selecting the best business structure for your business.
The coaching session on Wednesday, 3/17/2021 we’ll talk about business structures, the where, when and how. Sessions are always at 5 pm Pacific. Learn more at Wednesday Coaching.