May 24, 2024 • 19 mins
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.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to the Profitable Painter Podcast.
The mission of this podcast issimple to help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution While we strive
to provide accurate andup-to-date financial and tax
(00:20):
information, nothing you hear onthis podcast should be
considered as financial advicespecifically for you or your
business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
Speaker 2 (00:40):
We strongly recommend you seeking individualized
advice before making anysignificant financial decision.
This is Daniel, the founder ofBookkeeping for Painters and
this is Richard, tax directorwith Bookkeeping for Painters.
Speaker 3 (00:49):
How's it going?
It's going pretty good.
You know, the weather is reallystarting to turn towards summer
.
I feel like I always talk aboutthe weather on these things
because I don't really have agood segue.
But you know, what might be agood segue for today is I'm
coming from Illinois, which is astate that has a 4.95% income
(01:14):
tax.
And, daniel, what kind ofincome tax do you deal with in
Florida?
Speaker 2 (01:21):
0% income tax on the personal side.
So it's one of the reasons whywe're here.
Speaker 3 (01:30):
Yeah, that's a nice benefit.
See, here in our country Idon't know, I should have
counted this beforehand I thinkthere's like eight to 10 states
that don't have any kind ofpersonal income tax.
So places like Florida, texas,washington, tennessee, new
(01:52):
Hampshire, I believe, and I'mprobably missing a couple others
these are states that don'tassess an income tax on your
personal income and they're kindof the exception, not the rule,
right, because most places dohave some kind of a statewide
income tax.
I don't have it too bad here inIllinois.
(02:13):
Some of my fellow Illinoisanswould probably disagree.
We get hit pretty hard onproperty taxes, but as far as
income tax goes, we're a flatalmost 5%.
Other places, like California,are graduated and I think they
top out around 13% in thehighest bracket, so it can be
(02:34):
pretty significant depending onwhere you live.
Speaker 2 (02:40):
Yeah, it definitely can make a huge difference.
Especially as you start makingmore money, it becomes a bigger
and bigger thing to consider,for sure.
Speaker 3 (02:51):
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 togetting their income tax paid.
They're on it when it comes togetting their income tax.
So it's not just a matter ofwell, I live in Florida,
(03:14):
therefore I pay no income tax.
Because what if you live inFlorida but you do business in
Georgia or Alabama, or maybe youlive in Florida and you have a
rental property in California?
Is it just a matter of I'm aFloridian, I don't pay tax?
It would be nice California isgoing to disagree with you on
that one.
So the way it works is basicallystates feel that they are
(03:36):
entitled to tax money that isearned in their state and the
(03:58):
accounting jargon for that iseconomic nexus.
So you do business in our state, you use resources in our state
to generate income-2 is goingto show that your income was
derived in that state.
If you are a contractor, youmight get a 1099 that shows
income from whatever state youworked in.
If you are a partner in apartnership or a shareholder in
(04:22):
a corporation that's in a stateother than the one you live in,
you're going to get that K-1.
And it's going to be a federalK-1.
There's also going to be astate K-1, you know, with the
income from that state.
So they know, the states knowwhere the money was earned and
they're going to feel entitledto tax it.
(04:43):
Now just a little bit of a sidepoint here For W-2 employees.
So you work for somebody else.
A lot of neighboring stateshave what they call reciprocal
agreements to try and ease thatburden on employees.
So, for example, I'm inIllinois, illinois has a
(05:04):
reciprocal agreement withWisconsin and Iowa and Indiana
and Kentucky.
So I live in Illinois, I'm inNorthern Illinois, I go across
the border into Beloit,wisconsin, and I work for a
factory in Beloit.
My wages, even though they'reearned in Wisconsin, will be
(05:25):
taxed as if they were earned inIllinois.
So I only have to file one taxreturn.
Same thing with someone inBeloit comes down here and works
in Rockford.
That's for W-2 employees andonly for states that have those
agreements.
Not all states have thoseagreements, so check with your
local area.
But now what if I'mself-employed and I cross the
(05:47):
border and I work in Wisconsin?
Now all bets are off.
Now I've got economic nexus inthat state and now I have to
file not just my Illinois returnfor my resident state, but I
have to file a return withWisconsin or other places, other
states that I might work.
(06:07):
So that's, if you live in astate and you earn income from
another one, now what if youlive in a state like Illinois
that has a tax and I earn incomefrom Florida that doesn't have
a tax, does that mean I get tonot pay taxes on that income?
(06:30):
Well, that would seem logical.
So of course, that can't be theright answer.
Most states feel that they havethe right to tax money earned
worldwide by the residents oftheir state.
So even though my income may bederived from a tax-free area, I
(06:50):
live in Illinois.
Illinois says you have toreport it and you have to pay
taxes on it.
So, yes, we kind of get theworst of both ends.
So you want to be aware of that.
So there's a kind of a goodexample.
I'm a big football fan.
I grew up in South Florida, soI definitely love rooting for
(07:13):
the Miami Dolphins.
And when football players gettraded or they get offers in
Miami and sometimes they'llchoose to take an offer that
pays a little bit less, and thepundits will come and say, well,
(07:34):
yeah, you know he's taking apay cut to go play in Miami but
there's no income tax in Florida.
So therefore he'll make up whathe loses by not having to pay
taxes.
And you know that's sort oftrue for the eight games that he
plays, the eight home games heplays in Miami, he won't have to
pay any income tax because he'sa Florida resident earning
(07:58):
income in Florida.
But what happens when he goesup to New York, you know, a few
times a year to play the Jetsand the Bills, hopefully Miami
wins.
But he will also have to payNew York state income tax on the
money that he earns from thosegames.
Speaker 2 (08:19):
So even if he wins, he's kind of losing.
Speaker 3 (08:23):
Well, it's worth it if he can beat the Bills, but
that's just my opinion.
I hope we don't have any Billsfans in our audience.
No, they understand.
Yes, yes, if they go to NewYork to play the Bills and
Tyreek Hill gets $1.2 millionfor that game, he gets a W-2
(08:48):
showing income from the state ofNew York and he has to pay New
York income tax on that moneybecause he has economic nexus in
New York.
I was talking to a tax attorneyand he was telling me that he
had an NBA player as a clientonce and he had to file 30
(09:11):
different state returns becausethe NBA player played so many
games in so many differentstates.
Yes, so it's a good example ofthe states take this seriously
and they don't really have a lotof chill about not paying taxes
.
Speaker 2 (09:30):
Yeah, so really we're talking to the folks that are
living near a border and theyhave a service area, that
they're working in multiplestates, and we also have a few
clients where they have abusiness in one state but
they're actually living in aseparate state, and so they're
having to deal with this issuetoo.
Speaker 3 (09:49):
Yeah, absolutely.
And if you live on the borderof, let's say, virginia and West
Virginia, both states have astate income tax.
Whatever was earned in Virginia, virginia wants its cut.
Whatever was earned in WestVirginia, west Virginia wants
their cut, west Virginia wantstheir cut.
(10:11):
Something else to consider isthat this applies not just to
business income, but it can alsoapply to capital gains and
passive income.
So maybe you buy a property, arental property, in California,
you live in Florida, you buy aproperty in California, your
rental income from that propertyis subject to California taxes.
If you buy a property inCalifornia, your rental income
from that property is subject toCalifornia taxes.
(10:32):
If you sell that property at again, that gain is subject to
California taxes.
How will California know?
Well, hopefully, your rentalproperty is in some kind of an
LLC, because you are going toneed that asset protection and
in order to operate an LLC in adifferent state, you have to
(10:53):
register in that state.
So, yes, they know, this alsoapplies to, like sales tax,
which we won't really get intotoday, but you've got Nexus.
Make sure that you're payingsales tax in that state as well
If the state taxes the servicesyou're selling.
(11:15):
Another thing to considerdepreciation.
So you know we've talked a lotabout accelerated depreciation,
bonus depreciation, which iskind of phasing out now Section
179 depreciation, which has beenaround for a while.
This allows us to write offthings like vehicles and
(11:37):
equipment and machinery and takebig tax deductions on our
federal tax return.
The states don't usually playthe same game as the IRS.
So a lot of states will say youknow, bonus depreciation,
that's great for Uncle Sam.
But you know, here in our statewe use straight line.
(11:58):
So your state taxes arecalculated differently and
whatever state you earn themoney in is the state whose
rules you're going to have toplay by.
(12:19):
So I think the natural questionis like okay, well, this sucks.
If I live in a state with astate income tax and I do
business in a state with anincome tax, am I going to get
taxed twice?
The answer is mostly no.
A lot of states offer taxcredits so that you don't get
taxed twice and of course theydo this in the most convoluted,
confusing way possible, whereyou usually report all of your
(12:44):
income to your state and thentease out what was earned in
another state, figure out howmuch taxes you paid to that
other state and then take thatamount as a credit on your
resident state return.
So I know that was a bit of amouthful and it can be very,
(13:04):
very confusing, but at leastyou're generally not paying
double taxation when you havetwo different or multiple states
with an income tax.
Speaker 2 (13:16):
Yeah, and so I think the takeaway is to make sure
you're covered, because whenyou're audited because it's
always a question of when, notif if you're in business long
enough, and I think most folksin this trade are going to be in
it for the long haul, fordecades, right?
So when you get audited, youneed to have your books in line
(13:41):
and track where the income'scoming from which state.
If you're living on one ofthose border states, you're
doing jobs in multiple states.
Whatever the case is, you needto make sure your books reflect
what income is coming from whatstate.
And in QuickBooks Online, ifyou're using QuickBooks Online,
your customers should have anaddress in there of where
they're living, and so youshould be able to pull a report
(14:04):
based off that.
But you got to be invoicing outof QuickBooks Online or syncing
invoices over to QuickBooksOnline that has the address in
there, so that you can pull thatincome data on how much money
did you earn in Florida versusGeorgia, or whatever the case is
?
Speaker 3 (14:23):
Yeah, that class tracking and teasing it out is
extremely important because youwill need to allocate it between
the different states.
So you know we talked a lotabout if you earn money in
different states, you know howthat's going to affect you.
What if you are the presidentof an S-Corp or you're the
(14:49):
managing partner of apartnership and you have
non-resident shareholders?
So, for example, you arerunning an Illinois S-Corp,
earning income in Illinois andone of your shareholders lives
in Tennessee.
How is that handled?
(15:11):
Well, illinois knows that someof its revenue is going to a
Tennessee resident and they'reworried that the Tennessee
resident might not file taxes,might not pay Illinois its share
.
I mean, you know they're notused to filing individual state
income tax, so you know theymight not do it and it's
difficult for Illinois to goafter someone who's not a
(15:32):
resident of their state.
So what the states willgenerally do is they'll say,
okay, we're going to push theburden onto the S-Corp or the
partnership or whatever theentity is that earned the income
.
So you'll file a S-Corp orpartnership return with Illinois
(15:54):
or whatever state it is orwhatever state it is, and that
state, depending on its rules,might require you to withhold
some of that shareholder's moneyand remit it to the state.
It's kind of like forcing youto do estimated payments for
that non-resident shareholder.
So, for example, if yourpartner Bob, who lives in
(16:17):
Tennessee, earns $100,000 fromthe Illinois S-Corp, illinois
might say okay, our tax rate's5%.
We want the S-Corp to remit 5%$5,000, to Illinois, and when
Bob files his Illinoisnon-resident return then we'll
(16:39):
true it up and maybe we'll owehim a little bit of a refund.
But if Bob never files hisreturn, the state's like we got
paid.
So that's something to be takeninto consideration if you have
the responsibility of filing thetaxes for a corporation.
Another thing they might do isallow you to file what's called
a composite return where it'sand this usually kicks in when
(17:03):
there's more than onenon-resident shareholder and
that's basically allowing Bob tofile his individual Illinois
taxes with the Illinois S-Corpreturn.
Not all states allow this, butsome do.
It takes some of the reportingburden off of your non-resident
(17:24):
shareholders.
So that's something that youcan talk to your tax
professional about if you'reoverseeing an entity like an
S-Corp or a partnership.
But I think the bottom linehere is that the states have
been collecting taxes for a longtime and they know a lot of the
(17:44):
tricks and they know a lot ofthe ways that things fall
through the cracks and they areworking very hard to seal up
those cracks because they wantto be able to earn as much
revenue as possible.
So if you're doing business inmore than one state, it's very
important to understand one, howmuch of your business is
allocated to each state.
Like Daniel, you werementioning class tracking, and
(18:07):
QBO is an excellent way of doingit.
And then two, how are thesestates going to tax the money?
What are the filingrequirements you may need to
make estimated payments to anon-resident state if you're
earning money over there.
If I've got non-residentshareholders, what are their
obligations?
Am I required to withhold ontheir behalf?
(18:30):
It can get really tricky,really fast, and that's without
even discussing what qualifiesas economic nexus and do I
actually have to file a return?
So you know, definitely talk toa trusted tax professional,
someone who has experience withnexus with different states.
(18:51):
You know, your local CPA isprobably really awesome in that
locality, but unless he doesreturns nationwide and is
familiar with the requirementsof many different states, he
might not know that Wisconsinrequires you to withhold from
non-resident shareholders.
(19:12):
Or he may not know thatCalifornia has a different
depreciation schedule thanfederal, so finding someone
experienced in all 50 states isa good recommendation.
Speaker 2 (19:28):
Awesome, all right, so love to hear your thoughts on
this episode.
If you go to Grow your PaintingBusiness in Facebook and join
that group, love to hear yourthoughts on the episode.
Or if you have any ideas forfuture episodes, definitely let
us know.
And with that, we'll see younext week.
Speaker 3 (19:46):
Yeah, thanks for listening and have a great rest
of your day.
Welcome to the Profitable Painter Podcast.
The mission of this podcast issimple to help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution While we strive
to provide accurate andup-to-date financial and tax
(00:20):
information, nothing you hear onthis podcast should be
considered as financial advicespecifically for you or your
business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
Speaker 2 (00:40):
We strongly recommend you seeking individualized
advice before making anysignificant financial decision.
This is Daniel, the founder ofBookkeeping for Painters and
this is Richard, tax directorwith Bookkeeping for Painters.
Speaker 3 (00:49):
How's it going?
It's going pretty good.
You know, the weather is reallystarting to turn towards summer
.
I feel like I always talk aboutthe weather on these things
because I don't really have agood segue.
But you know, what might be agood segue for today is I'm
coming from Illinois, which is astate that has a 4.95% income
(01:14):
tax.
And, daniel, what kind ofincome tax do you deal with in
Florida?
Speaker 2 (01:21):
0% income tax on the personal side.
So it's one of the reasons whywe're here.
Speaker 3 (01:30):
Yeah, that's a nice benefit.
See, here in our country Idon't know, I should have
counted this beforehand I thinkthere's like eight to 10 states
that don't have any kind ofpersonal income tax.
So places like Florida, texas,washington, tennessee, new
(01:52):
Hampshire, I believe, and I'mprobably missing a couple others
these are states that don'tassess an income tax on your
personal income and they're kindof the exception, not the rule,
right, because most places dohave some kind of a statewide
income tax.
I don't have it too bad here inIllinois.
(02:13):
Some of my fellow Illinoisanswould probably disagree.
We get hit pretty hard onproperty taxes, but as far as
income tax goes, we're a flatalmost 5%.
Other places, like California,are graduated and I think they
top out around 13% in thehighest bracket, so it can be
(02:34):
pretty significant depending onwhere you live.
Speaker 2 (02:40):
Yeah, it definitely can make a huge difference.
Especially as you start makingmore money, it becomes a bigger
and bigger thing to consider,for sure.
Speaker 3 (02:51):
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 togetting their income tax paid.
They're on it when it comes togetting their income tax.
So it's not just a matter ofwell, I live in Florida,
(03:14):
therefore I pay no income tax.
Because what if you live inFlorida but you do business in
Georgia or Alabama, or maybe youlive in Florida and you have a
rental property in California?
Is it just a matter of I'm aFloridian, I don't pay tax?
It would be nice California isgoing to disagree with you on
that one.
So the way it works is basicallystates feel that they are
(03:36):
entitled to tax money that isearned in their state and the
(03:58):
accounting jargon for that iseconomic nexus.
So you do business in our state, you use resources in our state
to generate income-2 is goingto show that your income was
derived in that state.
If you are a contractor, youmight get a 1099 that shows
income from whatever state youworked in.
If you are a partner in apartnership or a shareholder in
(04:22):
a corporation that's in a stateother than the one you live in,
you're going to get that K-1.
And it's going to be a federalK-1.
There's also going to be astate K-1, you know, with the
income from that state.
So they know, the states knowwhere the money was earned and
they're going to feel entitledto tax it.
(04:43):
Now just a little bit of a sidepoint here For W-2 employees.
So you work for somebody else.
A lot of neighboring stateshave what they call reciprocal
agreements to try and ease thatburden on employees.
So, for example, I'm inIllinois, illinois has a
(05:04):
reciprocal agreement withWisconsin and Iowa and Indiana
and Kentucky.
So I live in Illinois, I'm inNorthern Illinois, I go across
the border into Beloit,wisconsin, and I work for a
factory in Beloit.
My wages, even though they'reearned in Wisconsin, will be
(05:25):
taxed as if they were earned inIllinois.
So I only have to file one taxreturn.
Same thing with someone inBeloit comes down here and works
in Rockford.
That's for W-2 employees andonly for states that have those
agreements.
Not all states have thoseagreements, so check with your
local area.
But now what if I'mself-employed and I cross the
(05:47):
border and I work in Wisconsin?
Now all bets are off.
Now I've got economic nexus inthat state and now I have to
file not just my Illinois returnfor my resident state, but I
have to file a return withWisconsin or other places, other
states that I might work.
(06:07):
So that's, if you live in astate and you earn income from
another one, now what if youlive in a state like Illinois
that has a tax and I earn incomefrom Florida that doesn't have
a tax, does that mean I get tonot pay taxes on that income?
(06:30):
Well, that would seem logical.
So of course, that can't be theright answer.
Most states feel that they havethe right to tax money earned
worldwide by the residents oftheir state.
So even though my income may bederived from a tax-free area, I
(06:50):
live in Illinois.
Illinois says you have toreport it and you have to pay
taxes on it.
So, yes, we kind of get theworst of both ends.
So you want to be aware of that.
So there's a kind of a goodexample.
I'm a big football fan.
I grew up in South Florida, soI definitely love rooting for
(07:13):
the Miami Dolphins.
And when football players gettraded or they get offers in
Miami and sometimes they'llchoose to take an offer that
pays a little bit less, and thepundits will come and say, well,
(07:34):
yeah, you know he's taking apay cut to go play in Miami but
there's no income tax in Florida.
So therefore he'll make up whathe loses by not having to pay
taxes.
And you know that's sort oftrue for the eight games that he
plays, the eight home games heplays in Miami, he won't have to
pay any income tax because he'sa Florida resident earning
(07:58):
income in Florida.
But what happens when he goesup to New York, you know, a few
times a year to play the Jetsand the Bills, hopefully Miami
wins.
But he will also have to payNew York state income tax on the
money that he earns from thosegames.
Speaker 2 (08:19):
So even if he wins, he's kind of losing.
Speaker 3 (08:23):
Well, it's worth it if he can beat the Bills, but
that's just my opinion.
I hope we don't have any Billsfans in our audience.
No, they understand.
Yes, yes, if they go to NewYork to play the Bills and
Tyreek Hill gets $1.2 millionfor that game, he gets a W-2
(08:48):
showing income from the state ofNew York and he has to pay New
York income tax on that moneybecause he has economic nexus in
New York.
I was talking to a tax attorneyand he was telling me that he
had an NBA player as a clientonce and he had to file 30
(09:11):
different state returns becausethe NBA player played so many
games in so many differentstates.
Yes, so it's a good example ofthe states take this seriously
and they don't really have a lotof chill about not paying taxes
.
Speaker 2 (09:30):
Yeah, so really we're talking to the folks that are
living near a border and theyhave a service area, that
they're working in multiplestates, and we also have a few
clients where they have abusiness in one state but
they're actually living in aseparate state, and so they're
having to deal with this issuetoo.
Speaker 3 (09:49):
Yeah, absolutely.
And if you live on the borderof, let's say, virginia and West
Virginia, both states have astate income tax.
Whatever was earned in Virginia, virginia wants its cut.
Whatever was earned in WestVirginia, west Virginia wants
their cut, west Virginia wantstheir cut.
(10:11):
Something else to consider isthat this applies not just to
business income, but it can alsoapply to capital gains and
passive income.
So maybe you buy a property, arental property, in California,
you live in Florida, you buy aproperty in California, your
rental income from that propertyis subject to California taxes.
If you buy a property inCalifornia, your rental income
from that property is subject toCalifornia taxes.
(10:32):
If you sell that property at again, that gain is subject to
California taxes.
How will California know?
Well, hopefully, your rentalproperty is in some kind of an
LLC, because you are going toneed that asset protection and
in order to operate an LLC in adifferent state, you have to
(10:53):
register in that state.
So, yes, they know, this alsoapplies to, like sales tax,
which we won't really get intotoday, but you've got Nexus.
Make sure that you're payingsales tax in that state as well
If the state taxes the servicesyou're selling.
(11:15):
Another thing to considerdepreciation.
So you know we've talked a lotabout accelerated depreciation,
bonus depreciation, which iskind of phasing out now Section
179 depreciation, which has beenaround for a while.
This allows us to write offthings like vehicles and
(11:37):
equipment and machinery and takebig tax deductions on our
federal tax return.
The states don't usually playthe same game as the IRS.
So a lot of states will say youknow, bonus depreciation,
that's great for Uncle Sam.
But you know, here in our statewe use straight line.
(11:58):
So your state taxes arecalculated differently and
whatever state you earn themoney in is the state whose
rules you're going to have toplay by.
(12:19):
So I think the natural questionis like okay, well, this sucks.
If I live in a state with astate income tax and I do
business in a state with anincome tax, am I going to get
taxed twice?
The answer is mostly no.
A lot of states offer taxcredits so that you don't get
taxed twice and of course theydo this in the most convoluted,
confusing way possible, whereyou usually report all of your
(12:44):
income to your state and thentease out what was earned in
another state, figure out howmuch taxes you paid to that
other state and then take thatamount as a credit on your
resident state return.
So I know that was a bit of amouthful and it can be very,
(13:04):
very confusing, but at leastyou're generally not paying
double taxation when you havetwo different or multiple states
with an income tax.
Speaker 2 (13:16):
Yeah, and so I think the takeaway is to make sure
you're covered, because whenyou're audited because it's
always a question of when, notif if you're in business long
enough, and I think most folksin this trade are going to be in
it for the long haul, fordecades, right?
So when you get audited, youneed to have your books in line
(13:41):
and track where the income'scoming from which state.
If you're living on one ofthose border states, you're
doing jobs in multiple states.
Whatever the case is, you needto make sure your books reflect
what income is coming from whatstate.
And in QuickBooks Online, ifyou're using QuickBooks Online,
your customers should have anaddress in there of where
they're living, and so youshould be able to pull a report
(14:04):
based off that.
But you got to be invoicing outof QuickBooks Online or syncing
invoices over to QuickBooksOnline that has the address in
there, so that you can pull thatincome data on how much money
did you earn in Florida versusGeorgia, or whatever the case is
?
Speaker 3 (14:23):
Yeah, that class tracking and teasing it out is
extremely important because youwill need to allocate it between
the different states.
So you know we talked a lotabout if you earn money in
different states, you know howthat's going to affect you.
What if you are the presidentof an S-Corp or you're the
(14:49):
managing partner of apartnership and you have
non-resident shareholders?
So, for example, you arerunning an Illinois S-Corp,
earning income in Illinois andone of your shareholders lives
in Tennessee.
How is that handled?
(15:11):
Well, illinois knows that someof its revenue is going to a
Tennessee resident and they'reworried that the Tennessee
resident might not file taxes,might not pay Illinois its share
.
I mean, you know they're notused to filing individual state
income tax, so you know theymight not do it and it's
difficult for Illinois to goafter someone who's not a
(15:32):
resident of their state.
So what the states willgenerally do is they'll say,
okay, we're going to push theburden onto the S-Corp or the
partnership or whatever theentity is that earned the income
.
So you'll file a S-Corp orpartnership return with Illinois
(15:54):
or whatever state it is orwhatever state it is, and that
state, depending on its rules,might require you to withhold
some of that shareholder's moneyand remit it to the state.
It's kind of like forcing youto do estimated payments for
that non-resident shareholder.
So, for example, if yourpartner Bob, who lives in
(16:17):
Tennessee, earns $100,000 fromthe Illinois S-Corp, illinois
might say okay, our tax rate's5%.
We want the S-Corp to remit 5%$5,000, to Illinois, and when
Bob files his Illinoisnon-resident return then we'll
(16:39):
true it up and maybe we'll owehim a little bit of a refund.
But if Bob never files hisreturn, the state's like we got
paid.
So that's something to be takeninto consideration if you have
the responsibility of filing thetaxes for a corporation.
Another thing they might do isallow you to file what's called
a composite return where it'sand this usually kicks in when
(17:03):
there's more than onenon-resident shareholder and
that's basically allowing Bob tofile his individual Illinois
taxes with the Illinois S-Corpreturn.
Not all states allow this, butsome do.
It takes some of the reportingburden off of your non-resident
(17:24):
shareholders.
So that's something that youcan talk to your tax
professional about if you'reoverseeing an entity like an
S-Corp or a partnership.
But I think the bottom linehere is that the states have
been collecting taxes for a longtime and they know a lot of the
(17:44):
tricks and they know a lot ofthe ways that things fall
through the cracks and they areworking very hard to seal up
those cracks because they wantto be able to earn as much
revenue as possible.
So if you're doing business inmore than one state, it's very
important to understand one, howmuch of your business is
allocated to each state.
Like Daniel, you werementioning class tracking, and
(18:07):
QBO is an excellent way of doingit.
And then two, how are thesestates going to tax the money?
What are the filingrequirements you may need to
make estimated payments to anon-resident state if you're
earning money over there.
If I've got non-residentshareholders, what are their
obligations?
Am I required to withhold ontheir behalf?
(18:30):
It can get really tricky,really fast, and that's without
even discussing what qualifiesas economic nexus and do I
actually have to file a return?
So you know, definitely talk toa trusted tax professional,
someone who has experience withnexus with different states.
(18:51):
You know, your local CPA isprobably really awesome in that
locality, but unless he doesreturns nationwide and is
familiar with the requirementsof many different states, he
might not know that Wisconsinrequires you to withhold from
non-resident shareholders.
(19:12):
Or he may not know thatCalifornia has a different
depreciation schedule thanfederal, so finding someone
experienced in all 50 states isa good recommendation.
Speaker 2 (19:28):
Awesome, all right, so love to hear your thoughts on
this episode.
If you go to Grow your PaintingBusiness in Facebook and join
that group, love to hear yourthoughts on the episode.
Or if you have any ideas forfuture episodes, definitely let
us know.
And with that, we'll see younext week.
Speaker 3 (19:46):
Yeah, thanks for listening and have a great rest
of your day.
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