William Martensen is an enrolled agent and award-winning tax professional who has led Martensen Tax & Financial in San Juan Capistrano since 2007. With nearly two decades of experience, he guides individuals and businesses through tax preparation, financial planning, IRS settlements and audits, entity formation, payroll, and bookkeeping. A graduate of the University of Arizona’s Eller College of Business and a multiple-time “Best Accountant” honoree, Mr. Martensen pairs technical precision with a service-oriented approach that makes him a trusted authority on complex multi-state tax matters.
As remote work becomes more common and businesses stretch across state lines, more taxpayers are earning income in multiple jurisdictions. This shift brings new tax challenges that go beyond federal rules. Navigating state-specific requirements is essential to prevent errors and avoid penalties.
Each state sets standards to define residency, allocate income, and determine filing obligations. These rules can confuse individuals living in one state but working, owning property, or operating a business in another. Without clear planning, overlapping laws may lead to double taxation, missed credits, or costly mistakes. For example, renting a second home out of state, even temporarily, can trigger new filing requirements.
Residency status plays a major role in state tax liability. Some states base it strictly on physical presence, while others focus on intent to remain long-term. When people split time between locations or move midyear, they may be treated as residents in more than one state, prompting separate returns and potential disputes. Determining a taxpayer’s true domicile adds another layer of complexity during transitions.
Business owners face similar issues, even without physical offices in every location. Hiring remote employees, shipping products, or offering services across state lines can create a taxable presence. Failing to recognize this early may result in unexpected tax bills and legal exposure.
A common pitfall involves not claiming credits for taxes paid in other states or skipping returns entirely. Many assume income is only taxed where they reside, but that’s not always the case. Some states have reciprocal agreements to avoid double taxation, yet these arrangements are limited and don’t apply everywhere. Taxpayers must know which states require filings and how income must be reported and allocated to avoid overlap and audit risk.
Avoiding these issues starts with preparation. Tracking where time is spent, keeping location-specific income records, and confirming a primary residence can help individuals avoid disputes. Businesses should map out where they serve clients or employ staff to determine which states require tax filings. For instance, a company serving customers in several states may need to review sales volumes to allocate income correctly.
Many states ask for documentation beyond federal returns. Individuals may be required to submit housing records, travel logs, or employer letters. Businesses might need to produce payroll data or service contracts to confirm nexus or residency. Keeping these materials organized can speed up filings and support audits when questions arise.
Tax software can help with basic returns, but often falls short when dealing with multi-state issues. Few platforms track changes in state law or handle overlapping rules effectively. A manual review can catch missed deductions and confirm accuracy, especially when estimating payments in states with different deadlines or methods.
Apportioning business income adds another layer. While some states base taxes on sales alone, others factor in payroll or property. These differences can shift a business’s tax burden significantly. For example, a company with major sales in a state may owe taxes there even without any employees or assets in that location. Knowing these rules can help businesses structure operations to stay compliant and reduce costs.
With more states ramping up enforcement, having a well-informed strategy is crucial. Understanding multi-state tax obligations, keeping accurate records, and seeking guidance where needed can protect against penalties and delays. Proactive planning allows for smoother filings and better financial outcomes.