Do You Fill Out a W-4 for the State You Live In or Work In?

Understanding where and how to file tax forms can be a complex task, particularly when dealing with multiple states. The W-4 form plays a key role in determining the correct amount of taxes withheld from your paycheck. Whether you complete this form for the state you live in or the state you work in depends on various factors.

Federal vs State Tax Withholding

Federal tax withholding, managed by the Internal Revenue Service (IRS), ensures individuals pay their federal income taxes throughout the year. Employees specify their withholding preferences on the W-4 form, factoring in marital status and dependents. The IRS updates withholding tables annually to reflect the latest tax brackets and standard deductions.

State tax withholding, overseen by individual state tax agencies, varies widely. Some states use forms similar to the federal W-4, while others, like California, require unique forms such as the DE 4, which incorporates state-specific allowances and credits. States like Florida and Texas, which do not impose an income tax, do not require state tax withholding.

Compliance with state tax withholding requires understanding state-specific regulations, including rules for nonresident employees or local taxes. For example, New York City imposes a local income tax in addition to the state tax, requiring additional withholding for employees working within city limits.

Living in One State, Working in Another

When living in one state and working in another, tax obligations depend on the regulations in both jurisdictions. Typically, the state where the income is earned has the primary right to tax it. However, the state of residence may also claim taxation rights on the same income, potentially leading to double taxation.

To address this, many states allow residents to claim tax credits for taxes paid to other states. For example, a New Jersey resident working in Pennsylvania can claim a credit on their New Jersey return for taxes paid to Pennsylvania. These credits vary by state, so understanding your home state’s provisions is essential.

Another factor is the distinction between domicile and residency. A domicile is your permanent home, while residency can be established by spending a certain number of days in a state. States such as New York apply the “183-day rule,” meaning spending more than 183 days in the state can trigger residency-based tax obligations.

Reciprocity Agreements

Reciprocity agreements simplify tax obligations for individuals living and working across state lines. These agreements allow residents to pay income taxes solely to their state of residence, regardless of where they earn their income. For instance, Illinois and Wisconsin have a reciprocity agreement that eliminates the need for dual tax filings.

These agreements require employees to submit a form certifying their residency, such as Wisconsin’s Form W-220, to their employer. This ensures taxes are withheld for the correct state. Employers in states with such agreements must adjust payroll systems accordingly and stay updated on any changes to these agreements.

Remote Work Tax Withholding

The rise of remote work has complicated state tax withholding, as employees often work from locations different from their employer’s office. This creates challenges in determining the correct state for tax withholding. The concept of “nexus,” which establishes a business connection to a state and dictates tax obligations, becomes more complex with remote work.

Some states, like New York, apply the “convenience of the employer” rule, taxing remote workers as if they were working in the employer’s location unless their remote work is necessary for the employer. This can lead to double taxation if the worker’s home state also claims tax rights. Other states have adopted measures to ease tax burdens for remote workers, particularly during the pandemic.

Nonresident or Part-Year Filing

Individuals living in a state for only part of the year or earning income in a state where they do not reside must understand nonresident and part-year filing rules. Nonresidents are required to file a state income tax return for any income earned in that state. For example, a Florida resident earning wages in Georgia must file a Georgia nonresident return and pay taxes on that income.

Part-year residents must file as such in states where they lived during the tax year, allocating income based on the time spent in each state. For example, someone who moved from Illinois to Indiana mid-year would need to determine how much income was earned while residing in each state. States like Illinois provide worksheets to help taxpayers prorate income, deductions, and credits. Keeping accurate records of employment dates, income sources, and residency changes is crucial to ensure compliance and avoid penalties.