Navigating the Complexities of Multi-State Tax for Painting Entrepreneurs
May 24, 2024
Daniel Honan
Discover how the maze of state income taxes can impact your painting business when you expand beyond your home turf. Join Daniel from Bookkeeping for Painters and myself, Richard, tax director, as we dissect the financial obligations that come with earning income across state lines. Whether you find solace in the tax haven of Florida or face the complexities of Georgia and California’s economic nexus, we've got the insights to keep your finances in check. Learn how global taxation principles apply, and why strategic business planning is crucial for handling the tax chaos of multi-state operations.
As we peel back the layers of state-specific tax laws, you’ll grasp the essentials of tracking income with precision, thanks to tools like QuickBooks Online. We’ll also navigate the stormy waters of LLC formation for asset protection, differences in state depreciation rules, and the tangled web of avoiding double taxation. For those involved with S-Corp or partnership entities, we cover the nuances of non-resident shareholder obligations, state withholding, and the potential relief composite returns offer. Daniel and I ensure that by the end of our chat, you'll be more equipped to tackle the taxing challenges of your multi-state painting enterprise.
Discover how the maze of state income taxes can impact your painting business when you expand beyond your home turf. Join Daniel from Bookkeeping for Painters and myself, Richard, tax director, as we dissect the financial obligations that come with earning income across state lines. Whether you find solace in the tax haven of Florida or face the complexities of Georgia and California’s economic nexus, we've got the insights to keep your finances in check. Learn how global taxation principles apply, and why strategic business planning is crucial for handling the tax chaos of multi-state operations.
As we peel back the layers of state-specific tax laws, you’ll grasp the essentials of tracking income with precision, thanks to tools like QuickBooks Online. We’ll also navigate the stormy waters of LLC formation for asset protection, differences in state depreciation rules, and the tangled web of avoiding double taxation. For those involved with S-Corp or partnership entities, we cover the nuances of non-resident shareholder obligations, state withholding, and the potential relief composite returns offer. Daniel and I ensure that by the end of our chat, you'll be more equipped to tackle the taxing challenges of your multi-state painting enterprise.
Speaker 1:
Welcome to the Profitable Painter Podcast. The mission of this podcast is simple to help you navigate the financial and tax aspects of starting, running and scaling a professional painting business, from the brushes and ladders to the spreadsheets and balance sheets. We've got you covered. But before we dive in, a quick word of caution While we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant.
Speaker 2:
We strongly recommend you seeking individualized advice before making any significant financial decision. This is Daniel, the founder of Bookkeeping for Painters and this is Richard, tax director with Bookkeeping for Painters.
Speaker 3:
How's it going? It's going pretty good. You know, the weather is really starting to turn towards summer. I feel like I always talk about the weather on these things because I don't really have a good segue. But you know, what might be a good segue for today is I'm coming from Illinois, which is a state that has a 4.95% income tax. And, daniel, what kind of income tax do you deal with in Florida?
Speaker 2:
0% income tax on the personal side. So it's one of the reasons why we're here.
Speaker 3:
Yeah, that's a nice benefit. See, here in our country I don't know, I should have counted this beforehand I think there's like eight to 10 states that don't have any kind of personal income tax. So places like Florida, texas, washington, tennessee, new Hampshire, I believe, and I'm probably missing a couple others these are states that don't assess an income tax on your personal income and they're kind of the exception, not the rule, right, because most places do have some kind of a statewide income tax. I don't have it too bad here in Illinois. Some of my fellow Illinoisans would probably disagree. We get hit pretty hard on property taxes, but as far as income tax goes, we're a flat almost 5%. Other places, like California, are graduated and I think they top out around 13% in the highest bracket, so it can be pretty significant depending on where you live.
Speaker 2:
Yeah, it definitely can make a huge difference. Especially as you start making more money, it becomes a bigger and bigger thing to consider, for sure.
Speaker 3:
Yeah, and you can imagine that. You know the states are very oh, they want to get paid. They're on it when it comes to getting their income tax paid. They're on it when it comes to getting their income tax. So it's not just a matter of well, I live in Florida, therefore I pay no income tax. Because what if you live in Florida but you do business in Georgia or Alabama, or maybe you live in Florida and you have a rental property in California? Is it just a matter of I'm a Floridian, I don't pay tax? It would be nice California is going to disagree with you on that one.
Speaker 3:
So the way it works is basically states feel that they are entitled to tax money that is earned in their state and the accounting jargon for that is economic nexus. So you do business in our state, you use resources in our state to generate income-2 is going to show that your income was derived in that state. If you are a contractor, you might get a 1099 that shows income from whatever state you worked in. If you are a partner in a partnership or a shareholder in a corporation that's in a state other than the one you live in, you're going to get that K-1. And it's going to be a federal K-1. There's also going to be a state K-1, you know, with the income from that state. So they know, the states know where the money was earned and they're going to feel entitled to tax it.
Speaker 3:
Now just a little bit of a side point here For W-2 employees. So you work for somebody else. A lot of neighboring states have what they call reciprocal agreements to try and ease that burden on employees. So, for example, I'm in Illinois, illinois has a reciprocal agreement with Wisconsin and Iowa and Indiana and Kentucky. So I live in Illinois, I'm in Northern Illinois, I go across the border into Beloit, wisconsin, and I work for a factory in Beloit. My wages, even though they're earned in Wisconsin, will be taxed as if they were earned in Illinois. So I only have to file one tax return. Same thing with someone in Beloit comes down here and works in Rockford. That's for W-2 employees and only for states that have those agreements. Not all states have those agreements, so check with your local area.
Speaker 3:
But now what if I'm self-employed and I cross the border and I work in Wisconsin? Now all bets are off. Now I've got economic nexus in that state and now I have to file not just my Illinois return for my resident state, but I have to file a return with Wisconsin or other places, other states that I might work. So that's, if you live in a state and you earn income from another one, now what if you live in a state like Illinois that has a tax and I earn income from Florida that doesn't have a tax, does that mean I get to not pay taxes on that income? Well, that would seem logical. So of course, that can't be the right answer. Most states feel that they have the right to tax money earned worldwide by the residents of their state. So even though my income may be derived from a tax-free area, I live in Illinois. Illinois says you have to report it and you have to pay taxes on it. So, yes, we kind of get the worst of both ends. So you want to be aware of that. So there's a kind of a good example.
Speaker 3:
I'm a big football fan. I grew up in South Florida, so I definitely love rooting for the Miami Dolphins. And when football players get traded or they get offers in Miami and sometimes they'll choose to take an offer that pays a little bit less, and the pundits will come and say, well, yeah, you know he's taking a pay cut to go play in Miami but there's no income tax in Florida. So therefore he'll make up what he loses by not having to pay taxes. And you know that's sort of true for the eight games that he plays, the eight home games he plays in Miami, he won't have to pay any income tax because he's a Florida resident earning income in Florida. But what happens when he goes up to New York, you know, a few times a year to play the Jets and the Bills, hopefully Miami wins. But he will also have to pay New York state income tax on the money that he earns from those games.
Speaker 2:
So even if he wins, he's kind of losing.
Speaker 3:
Well, it's worth it if he can beat the Bills, but that's just my opinion. I hope we don't have any Bills fans in our audience. No, they understand. Yes, yes, if they go to New York to play the Bills and Tyreek Hill gets $1.2 million for that game, he gets a W-2 showing income from the state of New York and he has to pay New York income tax on that money because he has economic nexus in New York. I was talking to a tax attorney and he was telling me that he had an NBA player as a client once and he had to file 30 different state returns because the NBA player played so many games in so many different states. Yes, so it's a good example of the states take this seriously and they don't really have a lot of chill about not paying taxes.
Speaker 2:
Yeah, so really we're talking to the folks that are living near a border and they have a service area, that they're working in multiple states, and we also have a few clients where they have a business in one state but they're actually living in a separate state, and so they're having to deal with this issue too.
Speaker 3:
Yeah, absolutely. And if you live on the border of, let's say, virginia and West Virginia, both states have a state income tax. Whatever was earned in Virginia, virginia wants its cut. Whatever was earned in West Virginia, west Virginia wants their cut, west Virginia wants their cut. Something else to consider is that this applies not just to business income, but it can also apply to capital gains and passive income. So maybe you buy a property, a rental property, in California, you live in Florida, you buy a property in California, your rental income from that property is subject to California taxes. If you buy a property in California, your rental income from that property is subject to California taxes. If you sell that property at a gain, that gain is subject to California taxes. How will California know? Well, hopefully, your rental property is in some kind of an LLC, because you are going to need that asset protection and in order to operate an LLC in a different state, you have to register in that state. So, yes, they know, this also applies to, like sales tax, which we won't really get into today, but you've got Nexus. Make sure that you're paying sales tax in that state as well If the state taxes the services you're selling.
Speaker 3:
Another thing to consider depreciation. So you know we've talked a lot about accelerated depreciation, bonus depreciation, which is kind of phasing out now Section 179 depreciation, which has been around for a while. This allows us to write off things like vehicles and equipment and machinery and take big tax deductions on our federal tax return. The states don't usually play the same game as the IRS. So a lot of states will say you know, bonus depreciation, that's great for Uncle Sam. But you know, here in our state we use straight line. So your state taxes are calculated differently and whatever state you earn the money in is the state whose rules you're going to have to play by.
Speaker 3:
So I think the natural question is like okay, well, this sucks. If I live in a state with a state income tax and I do business in a state with an income tax, am I going to get taxed twice? The answer is mostly no. A lot of states offer tax credits so that you don't get taxed twice and of course they do this in the most convoluted, confusing way possible, where you usually report all of your income to your state and then tease out what was earned in another state, figure out how much taxes you paid to that other state and then take that amount as a credit on your resident state return. So I know that was a bit of a mouthful and it can be very, very confusing, but at least you're generally not paying double taxation when you have two different or multiple states with an income tax.
Speaker 2:
Yeah, and so I think the takeaway is to make sure you're covered, because when you're audited because it's always a question of when, not if if you're in business long enough, and I think most folks in this trade are going to be in it for the long haul, for decades, right? So when you get audited, you need to have your books in line and track where the income's coming from which state. If you're living on one of those border states, you're doing jobs in multiple states. Whatever the case is, you need to make sure your books reflect what income is coming from what state. And in QuickBooks Online, if you're using QuickBooks Online, your customers should have an address in there of where they're living, and so you should be able to pull a report based off that. But you got to be invoicing out of QuickBooks Online or syncing invoices over to QuickBooks Online that has the address in there, so that you can pull that income data on how much money did you earn in Florida versus Georgia, or whatever the case is?
Speaker 3:
Yeah, that class tracking and teasing it out is extremely important because you will need to allocate it between the different states. So you know we talked a lot about if you earn money in different states, you know how that's going to affect you. What if you are the president of an S-Corp or you're the managing partner of a partnership and you have non-resident shareholders? So, for example, you are running an Illinois S-Corp, earning income in Illinois and one of your shareholders lives in Tennessee. How is that handled? Well, illinois knows that some of its revenue is going to a Tennessee resident and they're worried that the Tennessee resident might not file taxes, might not pay Illinois its share. I mean, you know they're not used to filing individual state income tax, so you know they might not do it and it's difficult for Illinois to go after someone who's not a resident of their state. So what the states will generally do is they'll say, okay, we're going to push the burden onto the S-Corp or the partnership or whatever the entity is that earned the income. So you'll file a S-Corp or partnership return with Illinois or whatever state it is or whatever state it is, and that state, depending on its rules, might require you to withhold some of that shareholder's money and remit it to the state. It's kind of like forcing you to do estimated payments for that non-resident shareholder. So, for example, if your partner Bob, who lives in Tennessee, earns $100,000 from the Illinois S-Corp, illinois might say okay, our tax rate's 5%. We want the S-Corp to remit 5% $5,000, to Illinois, and when Bob files his Illinois non-resident return then we'll true it up and maybe we'll owe him a little bit of a refund. But if Bob never files his return, the state's like we got paid. So that's something to be taken into consideration if you have the responsibility of filing the taxes for a corporation.
Speaker 3:
Another thing they might do is allow you to file what's called a composite return where it's and this usually kicks in when there's more than one non-resident shareholder and that's basically allowing Bob to file his individual Illinois taxes with the Illinois S-Corp return. Not all states allow this, but some do. It takes some of the reporting burden off of your non-resident shareholders. So that's something that you can talk to your tax professional about if you're overseeing an entity like an S-Corp or a partnership. But I think the bottom line here is that the states have been collecting taxes for a long time and they know a lot of the tricks and they know a lot of the ways that things fall through the cracks and they are working very hard to seal up those cracks because they want to be able to earn as much revenue as possible.
Speaker 3:
So if you're doing business in more than one state, it's very important to understand one, how much of your business is allocated to each state. Like Daniel, you were mentioning class tracking, and QBO is an excellent way of doing it. And then two, how are these states going to tax the money? What are the filing requirements you may need to make estimated payments to a non-resident state if you're earning money over there.
Speaker 3:
If I've got non-resident shareholders, what are their obligations? Am I required to withhold on their behalf? It can get really tricky, really fast, and that's without even discussing what qualifies as economic nexus and do I actually have to file a return? So you know, definitely talk to a trusted tax professional, someone who has experience with nexus with different states. You know, your local CPA is probably really awesome in that locality, but unless he does returns nationwide and is familiar with the requirements of many different states, he might not know that Wisconsin requires you to withhold from non-resident shareholders. Or he may not know that California has a different depreciation schedule than federal, so finding someone experienced in all 50 states is a good recommendation.
Speaker 2:
Awesome, all right, so love to hear your thoughts on this episode. If you go to Grow your Painting Business in Facebook and join that group, love to hear your thoughts on the episode. Or if you have any ideas for future episodes, definitely let us know. And with that, we'll see you next week.
Speaker 3:
Yeah, thanks for listening and have a great rest of your day.