Something Fishy This Way Comes

Disclaimer
I am not a tax professional. Do not take anything I write here as fact or advice. Question everything. Use your judgement, and, most importantly, seek professional advice as needed for your situation. Also, this targets the individual or sole-proprietor or possibly some pass-through income-earners. Those with other business or investment types likely have different filing concerns, whether or not your method is cash or accrual could have impacts, etc. etc. all not touched on further here. Obtaining sales tax and business licenses, permits, etc. are all also not otherwise touched on here, but could well be relevant to your particular situation as a mobile income-earner.

The dream usually begins with: “I/we want to travel the country. Now. Not ‘after we retire’ and because we’re not independently wealthy, we’ll need to work while we’re on the road.” or “I/we have a business and can do the needed functions from anywhere from an RV. Enjoy life!” or “I/we love to travel, why not find a way to earn money while doing it?”

Then the waters start to churn as the question of filing income taxes rises to the surface.

Filing income taxes can be a bad dream in the best of times. First, there’s a Federal return requirement dominating the waters. Next, your State filing requirement swims into the picture. Then the potential for having to file in multiple states shoves that bad dream into nightmare (or even night terror) status with its spooky, toothy grin. It’s now a nightmare with teeth — each state is essentially a ravenous piranha that wants a bite of you. Those intimidating dental bits take the form of penalties, fines, and other consequences that can come from not filing on time, or at all if you don’t know you were supposed to do so. (Ignorance != Excuse, and all that.)

Unfortunately many individuals — and I was one, for sure — don’t realize that even working short-term while physically located in a state other than your home state might result in having to explore filing an income tax return in multiple states.

Let’s repeat that for emphasis, shall we?

Even working short-term while physically located in a state other than your home state might result in having to explore filing an income tax return in multiple states.

How do we know when we have to file in another state? What are the rules and regulations exactly? How do we keep track?

It varies state by state, of course.

A handful of states have no income tax filing requirements for residents or non-resident earners. Most states, however, require all persons who earn money while within the borders of their state for X amount of time and/or earn Y amount of money are subject to filing. Some states have reciprocity agreements with other states, which may or may not require filing an exemption with your employer. Remember, when we’re self-employed, we’re both the employer and the employee and are responsible for both roles.

Oooh, and all this doesn’t even touch the fact that different localities (counties, cities, towns, etc.) can have their own income tax requirements. Egads, can you imagine the complexity of having to account for every locality you work in while on the road? Taking “on the road” quite literally: What if your significant other drives the RV while you work and the vehicle passes through 3 states, 10 counties, and 4 additional taxing localities?

It boggles the mind.

Senate bill S.604 might make a life of working on the road simpler should it, or something similar, ever pass.

 

In essence, it would make it so those with typical income streams* would have to produce income in a given state for more than 30 days each year to even need to be concerned about filing in that state as a non-resident.

 

Alas, such simplicity would be years away. As written, it would go into effect the second calendar year after it becomes an Act. If enacted this year, it will go into effect 2021.

 

* e.g. Not in professional sports, entertainment, or the like, who earn significant chunks of money for a short stay in a given location, a.k.a. “jock tax” though it applies to more than just athletes.

In the meantime, the best thing I can suggest — beyond seeking professional advice — is to keep records, good records, no, great fantastic fabulous stupendous impressive impeccable records of what work you did where and when and why and for whom and how much income can be attributed to work done while within the borders of a given state.

 Ah, but that last bit is a swarming school of piranhas closing in, ready to nibble. {Waaait, do fish “swarm”?}

How much income can be attributed to work done while within the borders of a given state.

OK, let’s look at some scenarios, and we’ll start with saying that your domicile is Colorado, meaning, roughly, that your permanent place of residence, where you license/register your vehicles, exercise your voter rights, etc. are all tied to Colorado. To make matters more complicated, if you’re genuinely on the road full-time with no permanent / primary residence to which you return and live regularly, you may have no tax home. However, the concept of a tax home applies more to potential business expense deductions and thus lies beyond the scope of this ramble, so for this post, we’ll say your tax home is also Colorado.

Now let’s say that you’re a “road warrior” who travels for extensively for work and you earn 100% of your income as an employee of a corporation which diligently withholds taxes for every applicable state to which they send you. Half the equation has been completed for you: how much you earned while in each state. Then you only have to worry about the actual state-by-state filing, if needed, based on each state’s rules and regulations.

Many (most?) companies do not do this for their traveling employees. It can be cost-prohibitive for them to track every state, every locality, for every employee, track their whereabouts and earnings in each locality, and to collect, submit, and report withholdings accordingly. So, the individual is then 100% responsible for their own state-by-state earnings calculations as well as filings (which, of course, they are anyhow).

Yet even for those companies that try to take care of this for their employees, are they adequately accounting for the time spent checking work email during a layover in O’Hare? Making work-related calls from a Lyft which picked their employee up at Denver International Airport? Ridiculous, you might think, but some states, such as Colorado, have no waiting period or minimum income amounts needed before the need to file in that state raises its ugly head. As soon as you cross that state border, the potential for attribution of earning begins.

So let’s say you’re taking a year off from cube-land and traveling the country, then for a bit of income along the way you find a work-camp position in North Dakota at a state park in return for an RV spot and a small hourly wage. Or you tent camp in the woods and work part-time in a nearby locally-owned restaurant for wages and tips for a few weeks. Easy peasy, that income is earned in North Dakota and paid via a North Dakota source. Look into the non-resident filing requirements for North Dakota and file in Colorado as required.

Now let’s say you earn some income as a travel bloggerWhich state(s) is/are your income source(s) when …

(A) You hike for a day in Utah then write up a blog entry before you leave the state and you get paid by someone in Virginia explicitly for that content which they then post on their website; you even miraculously receive payment for it while you’re still in Utah. OK, that seems pretty straightforward — income earned and paid while in Utah, therefore at least look into the non-resident filing requirements for Utah. Buuut, the payment didn’t come from a Utah “source.” Do you need to look into filing in Virginia instead of Utah? Or in addition to Utah? Or do you only file in Colorado?

Does where your employer or client have their business presence impact in which state(s) you might need to file? {It might if your home state does not have a “physical presence” rule. See tip #2 of 10 Tax Tips linked below.}

(B) You hike for a day in Utah then write up the blog entry about it for your Virginia client while you are in Nevada prepping for the start of another touristy activity to review and you receive payment for it while you’re driving through Idaho? Does Idaho need to be considered because that’s where you were when you received payment?

Does your physical location when you receive payment affect anything? {Uh uhn. Nope. We’re surely not filing internationally for paychecks received while we were on vacation in Japan! I just had to include an over-the-top option for levity. You’re laughing at the ridiculousness of it, aren’t you?  But then, tax laws are pretty crazy so maybe you’re crying. Ahem. See also: (G) for a variant of this question. }

(C) You hike for a day in Utah then write up the blog entry about it while in Nevada prepping for the start of another touristy activity to review but don’t get paid by anyone directly for the blog entry. Rather you earn income from advertisements on your website, and the blog entry is just used to entice people to visit that site.

Is the time spent preparing content for a website which collects revenue from advertisements even considered income-producing at all? If so, how do you apportion it?

(D) You post that blog entry to your website, then also: talk about the experience in a video for your income-producing YouTube account, add the blog post to a download-for-a-fee ebook, incorporate the content of the post into a travel book you sell on Amazon, and use it as an example in a how-to-earn-money-while-travelling book, video, ecourse, and paid-lecture series. What then?

Are you lost in the depths of the piranha-infested waters yet? I am. I hope I’m over-thinking / over-complicating this.

Anyhoot, I do think scenario (D) would best be handled by breaking it down. e.g. if you’re paid to deliver a lecture on the topic in Oregon, then the income-producing portion of that would be attributed to Oregon regardless of where you gathered the fodder to produce that lecture. I might be delusional, but hopefully, the rest would be attributable only to your home state.

What about how the way you earn is categorized? In (A) and (B) you’re possibly a full-time employee but more probably a contractor or freelancer producing work for someone else. In (C) and (D) you’re probably producing the work on your behalf. In any scenario, it could be a side-gig or a primary income stream. Does any of that even have any impact? I don’t think so. The few references I can find online say only “employee” (typically W2) or “independent contractor” (usually 1099). For simplicity’s sake, we’ll consider any non-1099-receiving self-employed income the same as 1099 income as far as the tax regulations are concerned and set the earning category aside as non-relevant.

Back to the location-independence aspect of being on the road even a little, a lot, or full-time, because it begs so many questions about how one determines when and where income was “earned.”

So then, let’s continue with scenarios, still with Colorado as your home state. Which state(s) is/are your income source(s) when …

(E) You’re working on an IT project for 3 hours while in Arizona, 15 hours in New Mexico, 15 hours in Texas, 1 hour in Kansas, and log another 6 hours after you return to your sticks and bricks home in Colorado. That’s where you are when get paid for the work. What then?

Because this is most closely akin to the “road warrior” scenario, I believe it’s also the most realistic possibility for having to file in multiple states even though you might feel like you’re just doing your regular job as you would if you were home in Colorado. So let’s look at the individual states in more depth (again, I am not a tax professional, this is all just an opinion of an interpretation of information collected from the internet and could be all wrong!).

  1. Colorado – because this is your home state, you should include all income across all sources from everywhere/anywhere you earned it. As a Colorado resident, you are required to file IF “you are required to file a federal income tax return with the IRS for this year or will have a Colorado income tax liability.” You should also qualify for a credit against any tax you end up paying to another state, if any.
  2. Arizona – appears you must file IF the total amount of income earned in AZ exceeds a certain threshold for the tax year. So, with our scenario, unless the hourly rate for the 3 hours you worked here is breathtaking (in which case outsource some of your work to me, pretty please?!), there’s no need to file.
  3. New Mexico – this state’s high-level description says anyone with income from any New Mexico source “must file,” period.
  4. Texas – yeeeha, Texas has no state income tax on residents or non-residents for any income earned within the state. Thus, no additional state income tax filing requirement here. :0)
  5. Kansas – similar to New Mexico, this state’s high-level description says anyone with income from any New Mexico source “is required” to file, period.

Now we have a possible need to file in Colorado, and then also New Mexico and Kansas IF the income earned can be attributed to those states. So, we’ve circled back to the basic question:

Have you earned income that IS “sourced” to any state besides Colorado? 

I dunno!

For fun let’s add elements of producing a physical product and in-which-tax-year was the sale? … 

(F) You photograph a buffalo in Montana, manipulate the image while in Alberta, and then put it up for sale on your portfolio website while relaxing on your porch overlooking the Colorado Rockies (mountains, not baseball players) and it starts selling immediately? Or doesn’t sell at all until the next year? Or you begin creating jewelry pieces in Louisiana, work on them in Mississippi, Ohio, and New York, then post them to your Esty site while in New Hampshire. One sells while you’re in Rhode Island the same year and another two while at home the following year.

Does the income source of physical product sales override the where and when of the individual product production steps?

(G) You go on a writer’s retreat and write 70% of a first draft in Maine. You finish, revise, and edit it while in Florida, then submit it the next year to an agent while at home in Colorado. You do more edits at the direction of the agent then a publisher across more than a year and from various locations. Even more years down the road, it’s finally published and earning income. You haven’t actually earned any income in this scenario until many tax years after the creative process, and the check rolls in on the fine May day you’re moving from Colorado to Texas.

Does your home state at the time you receive payment affect in which state(s) you need to file?

I want to assume in at least (F) and (G) that you only file in whatever your home state happens to be at the time of filing. Hell, I’d like to assume that for (A), (B), (C), and most parts of (D) as well. I also wish it to be true of (E), but I’m not holding my breath on that one.

But, alas, I hate to assume or wish when penalties are involved.

Inquiring minds want to know. 

I don’t have any answers.

A few months ago, I didn’t even know enough to give these questions a moment’s thought.

I remember those days fondly.

Now I realize that working remotely from a relative’s house in another state should have resulted in me at least being aware that I could have needed to file an income tax return in that state. Happily, after researching it, I didn’t have a high enough hourly at the time for the [number of hours worked over the length of my various stays each year] to result in any need to file a non-resident return in that particular state even if I were 100% sure that the income was considered earned in that state per all the rules and regulations. {whew} Do I even have the answer as to whether or not the income earned during my past stays WAS attributable to that state? Nope.

Now that I’m aware, the idea of earning income as employees / contractors / freelancers / artists / writers / photographers while on the road full time might not be quite as mentally freeing as I’d like it to be. It still could be 99% freeing, so well worth it, but it also might lose that 1% due to the possible overhead of extensive record-keeping and potential multi-state income tax filings every year.

Thus it’s something which requires further investigation.

Are we at the point of paying a tax professional to advise us on our particular situation? Not remotely. {Ha ha, get it?} But it is undoubtedly something added to the list of To-Dos prior to going on the road full time should we ever choose to go that route.

All I’m saying here is:

Understand that the dream of being location-independent while earning income might come with a toothy fish or two attached. 

So keep records and seek the assistance of a tax professional to assist you in figuring out in which state(s) you’ll need to file.

Did I mention that seeking professional advice is a good idea?

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Still here? Some further reading options for your pleasure, or displeasure as the case may be.


Image source: 8385 via Pixabay (License).