When Do You Have to Pay State Taxes?

Determining if you owe state income tax involves more than just where you live. While the federal government has a uniform income tax, state tax rules are a patchwork of regulations. Not all states impose an income tax, but for those that do, the laws can be intricate. The complexity increases for those who move, work in multiple states, or earn income from various sources.

Establishing State Tax Residency

A state’s authority to tax your income hinges on your residency status. States classify individuals into one of three categories: resident, nonresident, or part-year resident. To make this determination, states rely on two tests, and failing to understand them can lead to unexpected tax bills or penalties.

The first test is “domicile,” which is your true, fixed, and permanent home—the place you intend to return to after any absence. An individual can only have one domicile at a time. When a state audits residency, it looks for objective evidence of intent, including:

• Where you are registered to vote
• Where your driver’s license is issued
• Where your family resides
• Where you maintain significant personal and financial connections

Simply moving is not enough; you must demonstrate a clear intent to abandon your old domicile and establish a new one. This involves tangible actions such as selling a home in the prior state, purchasing or leasing a residence in the new state, and changing your mailing address for all important correspondence. States scrutinize these factors because a change in domicile can significantly reduce tax liability, especially when moving from a high-tax state to one with no income tax.

Separate from domicile is the test for “statutory residency,” an objective measure based on physical presence. Most states with an income tax have a “183-day rule,” which provides that if you spend more than 183 days of the year in the state, you are considered a statutory resident for tax purposes. A “day” is counted as any part of a day spent in the state, with narrow exceptions for transit or medical treatment.

It is possible to be domiciled in one state but become a statutory resident of another. For example, if your permanent home and family are in Florida, but you spend seven months of the year living in an apartment in New York for a work assignment, New York will likely consider you a statutory resident. This means New York can tax your income earned there, even though your domicile remains in Florida.

Sourcing Income to a State

Once your residency status is established, the next step is to determine which income a state can tax through a process called income sourcing. States can tax residents on their “worldwide income,” meaning all income from any source. For nonresidents, a state’s taxing power is limited to income derived from sources within that state’s borders.

Wages and salary income are sourced to the location where the work is physically performed. For income from a business, such as a sole proprietorship or a pass-through entity like an S corporation, the sourcing rules follow a similar logic. The portion of the business’s income attributable to its operations within a state is sourced to that state, which often requires an apportionment formula.

Investment income, which includes interest, dividends, and capital gains from intangible property like stocks and bonds, is treated differently. This income is sourced to the taxpayer’s state of residence or domicile. For instance, if you are a resident of California and receive dividend income from a company headquartered in Texas, that income is taxable by California, not Texas.

Retirement income, such as distributions from pensions, 401(k)s, and Individual Retirement Arrangements (IRAs), is taxed only by the state where you are a resident when you receive the money. Federal law prohibits states from taxing the retirement income of their former residents. This means if you earn a pension over 30 years of working in a high-tax state but move to a no-income-tax state before you start taking distributions, your former state cannot tax that income.

Navigating Multi-State and Remote Work Scenarios

Modern work arrangements like moving, commuting, and remote work complicate residency and income sourcing rules. These situations create unique tax circumstances that require careful navigation to avoid penalties.

When you move from one state to another during the year, you become a part-year resident in both. For tax purposes, you will file a part-year resident return in each state. You report all income earned from all sources during the period you were a resident, plus any income sourced to that state while you were a nonresident.

Living in one state while working in another requires filing two tax returns. You file a nonresident return in the work state for income earned there, and a resident return in your home state for all your income. To prevent the same income from being taxed twice, your home state will offer a credit for taxes paid to another state.

For example, if you live in State A and pay $3,000 in income tax to State B where you work, State A will allow you to claim a credit, reducing your tax liability to them. The credit is usually limited to the amount of tax State A would have charged on that same income, ensuring you effectively pay the higher of the two states’ tax rates on that portion of your income.

Some neighboring states have reciprocal agreements allowing commuters to pay income tax only to their state of residence. This eliminates filing a nonresident return in the work state, but the employee must file a non-residency certificate with their employer.

The rise of remote work has introduced the “convenience of the employer” rule in a few states. This rule sources an employee’s income to the employer’s state if working from home is for personal convenience, not a company requirement. This can result in owing taxes to an employer’s state even if you never work there.

State Filing Thresholds and Payment Deadlines

After determining you have a state tax obligation, you must understand the requirements for filing and paying. Each state sets its own rules based on factors like income level and filing status.

Every state with an income tax establishes a minimum gross income threshold that must be exceeded before a return is required. These thresholds vary and are often adjusted by filing status, such as single or married filing jointly. Earning even a small amount of income in a nonresident state could trigger a filing requirement.

The deadline for filing a state return and paying tax is aligned with the federal deadline, April 15th. If this date falls on a weekend or holiday, the deadline shifts to the next business day. An extension provides more time to file but not to pay; estimated tax is still due by the original deadline to avoid penalties.

Many taxpayers must pay state income taxes throughout the year through quarterly estimated tax payments. These payments are required for individuals with significant income not subject to withholding, such as from self-employment. The requirement is triggered if you expect to owe more than a certain amount, often around $1,000, after accounting for withholding and credits.

These estimated payments are divided into four installments with due dates spread throughout the year:

• April 15
• June 15
• September 15
• January 15 of the following year

Paying at least 90% of your current year’s tax liability or 100% of your prior year’s liability through these timely payments can help you avoid underpayment penalties.