How Is State Tax on Bonus Income Calculated After Moving?

Receiving a bonus can be exciting, but if you’ve recently moved to a new state, determining how much tax you’ll owe can be complicated. Each state has its own tax rules, and where you lived when the bonus was earned versus when it was paid affects which state gets to tax it.

Understanding residency status, withholding rules, and potential tax credits is key to navigating these differences.

Bonus Withholding Rules

Employers must withhold federal and state taxes on bonus payments, but methods vary. The IRS treats bonuses as supplemental income, with a flat 22% federal withholding rate for amounts under $1 million and 37% for any portion above that. States follow different rules—some use a flat percentage, while others apply standard income tax rates.

For instance, California withholds bonuses at 10.23%, while New York uses regular income tax brackets. Pennsylvania imposes a fixed 3.07% rate, whereas Illinois uses 4.95%. Moving between states with different withholding rates can impact how much is deducted upfront.

Employers determine which state’s withholding rules apply based on payroll records. If an employee moves mid-year but receives a bonus tied to prior work, withholding may still follow the previous state’s rules. Some states, like New Jersey, require withholding based on where the work was performed, while others, such as Georgia, base it on residency at the time of payment.

Part-Year Residency Implications

Moving mid-year means tax obligations don’t reset immediately. Most states require part-year residents to report income separately for the time they lived in each state. Some states tax all income received while a resident, regardless of where it was earned, while others tax only income sourced to that state.

Timing plays a key role. If a bonus is paid after establishing residency in a new state, that state may claim it as taxable income, even if the work was done elsewhere. Conversely, if the bonus was earned before the move but paid while still a resident of the previous state, that state may still tax it. Massachusetts taxes income based on when it was earned rather than when it was received, while Florida’s lack of a state income tax makes the timing of a move particularly impactful.

State tax credits can help prevent double taxation when both states claim the right to tax the same income. Many states allow part-year residents to claim a credit for taxes paid to another state, but some exclude bonuses or stock compensation. Without a credit, taxpayers may need to allocate the income based on time spent working in each location, which can require detailed payroll records.

Nonresident Filing Requirements

Living in one state while earning income from another often creates tax filing obligations in multiple jurisdictions. Nonresidents—those who do not reside in a state—may still need to file a return if they earned income sourced there. This typically applies to wages, bonuses, commissions, and other compensation tied to prior work, even if payment occurs after relocation.

Many states use a “source-based” taxation method, meaning earnings are taxed where the work was performed, not necessarily where the employee resides. For example, if an employee worked in North Carolina for most of the year but moved to Tennessee before receiving a year-end bonus, North Carolina may still require a nonresident return. Some states, such as Virginia, exempt nonresidents from filing if earnings fall below a certain threshold—$11,950 in 2024. Others, like New York, aggressively enforce nonresident taxation, often requiring documentation to prove income should not be allocated there.

Failure to file a required nonresident return can result in penalties, with some states imposing interest on unpaid taxes from the original due date. California applies a late-filing penalty of 5% per month, up to a maximum of 25%, plus interest at a rate that adjusts quarterly. Some states also conduct residency audits, particularly when a taxpayer moves from a high-tax state to a no-tax state, scrutinizing financial records and even social media activity to verify income allocation.

Reciprocity Agreements

Some states have reciprocity agreements that simplify tax obligations for individuals who live in one state but work in another. These agreements allow residents to pay income tax only to their home state, avoiding the need to file a nonresident return. For example, a Maryland resident working in Washington, D.C., is not required to pay D.C. income tax.

These agreements primarily affect wages and salaries, meaning bonuses, stock options, or deferred income may still be taxable in the state where they were earned. If an individual moves from a state with a reciprocity agreement to one without, they may face unexpected withholding on future bonus payments. For instance, an Illinois resident working in Wisconsin benefits from the Illinois-Wisconsin reciprocity rule, but relocating to a non-reciprocity state mid-year may result in Wisconsin withholding taxes on income sourced there.

Local Add-On Taxes

Some cities and counties impose additional income taxes, further complicating bonus withholding after a move. These local taxes are common in states like Ohio, Pennsylvania, and New York, where municipalities have independent tax structures. If an employee relocates from a city with a local income tax to one without, or vice versa, the impact on take-home pay can be significant.

For example, New York City imposes a local income tax ranging from 3.078% to 3.876%, which applies to residents but not nonresidents. Moving from Manhattan to a New Jersey suburb eliminates this tax, increasing net income. Conversely, relocating to Philadelphia, which has a 3.75% wage tax for residents, raises overall tax liability. Some localities require employers to withhold based on work location rather than residency, meaning an employee who commutes into a city may still see deductions even after moving.

Certain jurisdictions allow for credits or exemptions to mitigate double taxation, but rules vary. In states like Indiana, where multiple counties impose income taxes, an individual who moves mid-year may need to allocate earnings between different local tax rates. Employers may not always adjust local withholding automatically, requiring employees to submit updated tax forms to ensure correct deductions.

Adjusting Withholding

After a move, updating tax withholding is essential to avoid unexpected liabilities or large refunds. Employers base withholding on the most recent state and local tax forms submitted, so failing to update records can lead to incorrect deductions. Employees should promptly file a new Form W-4 for federal taxes and any state-specific withholding forms required by their new state of residence.

Some states allow employees to request specific withholding adjustments to account for part-year residency or nonresident income. For instance, Connecticut permits taxpayers to file Form CT-W4NA to ensure withholding reflects only income earned while working in the state. In contrast, states like Missouri require individuals to manually adjust estimated tax payments if withholding does not accurately reflect their tax situation. Employees receiving large bonuses may also opt for additional voluntary withholding to prevent underpayment penalties, particularly in states with high-income tax rates.