Tax, Payroll, Finance, Technology

Live in one state, work in another

Q. I live in Michigan and just started a new job working in Illinois.  I’ve never been in a situation with two states before.  My payroll department wants me to fill out all these different forms.  What should I do?

A. I love multi-state tax situations!  It’s like job security for accountants.  The answer to your question lies in the underlying method of taxation followed by most states.  You owe taxes where you work.  Where the job is done is where you are paid and where the tax liability is incurred.  In your case, that would be Illinois.  According to this link on Payroll-Taxes.com, Illinois has reciprocity agreements with Iowa, Kentucky, Michigan, Wisconsin.  The agreement with Indiana expired several years ago and was never renewed for some reason.

A reciprocity agreement is useful for helping tax payers only file returns in one state.  Under the laws of other states, if you work in one state and live in another, you would end up paying tax to your employment state and filing a tax return.  Then you would file a tax return for the state of your residence.  After calculating your liability, you may be given a credit for taxes paid in another state, or you may not and you would end up being double taxed (depends on your state).  If your employment and resident states have a reciprocal agreement, and your employer chooses to do this, you can have taxes withheld in your resident state only.  You then only file a tax return in your home state.

In your case, you would need to provide appropriate withholding forms to your employer stating for which state your taxes should be withheld.

  1. You can provide an IL-W4 and just have Illlinois withholding (not necessarily a good idea)
  2. You can provide an IL-W-5-NR which certifies that you are not a resident of Illinois and that you live in a reciprocal state.  You then also need to provide an MI-W4 to tell your employer how to withhold Michigan taxes. (more likely this is the correct scenario for you)

For anyone doing research on this topic, Payroll-Taxes.com provides a list of the reciprocal states for each state by simply accessing that state’s index page.  You can see all the necessary forms for these types of situations using the forms listing page on StateW4.com

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2 thoughts on “Live in one state, work in another

  1. gubamebsat says:

    So here’s another scenario. I work for a business in NM, but have worked from home for more than 4 years, until recently my home office was in NM. I just moved (due to husband’s job) to CO. I am still employed by NM business and still work from home, just in CO now instead of NM. My employer is saying they can’t withhold CO taxes because they are not registered (incorporated) to do business in CO so they day I will need to become an independent contractor in order to stay “employed”. Can they just withhold NM taxes still and can I file in NM and CO since I am doing work for a NM business?

  2. CPA Sam says:

    Just posted a new article on my blog discussing your issue. You can read it here, http://askcpasam.com/blog/2012/07/30/live-in-one-state-work-in-another-2/.

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