Advice on Income Taxes for the "Virtual Office"

Silas asks: "I've been working for a website development firm in Indiana, but will soon be moving from Indiana to Ohio. From Ohio, I'll continue to work for that Indiana-based firm via phone, e-mail, and the occasional commute. I'm wondering what the implications are for income taxes - namely, am I living and working in Ohio, or am I living in Ohio and working in Indiana, or some weird mutation of those? Any advice from others working in similar 'virtual office' situations?"

"Some additional info is below for IANAL and IAAL readers alike:

• The firm is an LLC based in Richmond, Indiana. I'm moving to Cincinnati, Ohio.
• I am an owner/partner of the firm, so my taxes are paid as quarterly estimates instead of being drawn from each paycheck.
• I'm interested in legally minimizing the chunk of income that the gub'ment gets.
• I'm interested in keeping my tax return as simple as possible.

Thanks for any assistance you all can give me on this matter."

In similar situation.

[phUnBalanced]

I currently live in Maryland and work for a company in NY.

Tax wise I reside in Maryland and pay taxes here. My company withholds Maryland Income Tax for me automatically so if there's anything complicated, they handle it on their end, but as far as I know, you always pay income tax based on where you reside.

Re:In similar situation.

[aminorex]

This guy is right. I've telecommuted for 12 years.
You always pay taxes in your state of residence.
I'm moving out of the country, so that I won't have
to pay income taxes on the first 80,000 of adjusted
gross income.

Don't pay a tax lawyer, just get a good book
and determine the answer yourself. But it's
always the same deal.

Re:In similar situation.

[gi-tux]

Not necessarily true. If you live in Tennessee and work in Alabama, you must pay Alabama Income Tax. I haven't hit this personally, but my uncle did, and I do see it on my Alabama tax form.

Re:In similar situation.

[penguinboy]

Not always the case. For example, New Hampshire residents who commute to jobs in Massachusetts must pay Masachusetts income tax.

Thoughts

[renehollan]

IANAL and IANATA (I am not a tax advisor).

That said, you probably "live" where your "head meets the pillow", and work there as well. The tax residence of the LLC probably matters the most, as well as the temporary/permanent nature of your relationship with them (i.e. you're not employed in one state, temporarily working in another).

Still, I'd consult a tax advisor about this.

Re:Thoughts

[Raiford]

I have heard this question before from other sources. The general rule is that you pay income taxes where you live and vote. This is the only technical way that taxation without representation can be prevented. If you had to pay taxes in Indiana, you would technically have no voice in how the tax money was used (not to say that you really do anyway). This is the theory anyway.

Re:Thoughts

[walt-sjc]

That's the theory, but it doesn't always hold true in practice.

Tax laws vary state by state. You will NEED to consult a tax person who is familiar with tax laws in both states.

If you border hop to go to work, IE live in NH and work in MA, you pay MA income tax. NH doesn't have an income tax, but DOES have really high property tax (about 4 times the rate in San Jose for example) and high sales tax. A person in this situation gets screwed.

If you work out of a home office, things get "tricky" but you will probably only need to pay local (to where you live) taxes.

hire a professional

[YaRness]

seriously, don't ask slashdot goons for tax advice. it's worth paying the 100 bucks or whatever to a tax firm to do your return for you, and tell you what information you need to keep track of for the next year.

Re:hire a professional

[LordNimon]

I agree, this is a stupid Ask Slashdot. Your situation is not new or unique to the tech world, as there are plenty of individuals (mostly in marketing or sales) who work in one state at home while their employer is in another. I know two personally, and neither of them are tech people.

You need to speak to an accountant familiar with the laws in your state.

Re:hire a professional

[CaptainStormfield]

Or ask a lawyer. His/Her answer is much more likely to be correct. Plus, unlike Slashdot, you can sue the lawyer if the answer is wrong.

Ask Google

[netringer]

http://www.in.gov/dor/assistance/index.html [in.gov]
https://ohiocrm.das.state.oh.us/tax/default.asp?2= default%5E20&10=TAX [state.oh.us]

It looks like Indiana and Ohio have some sort of recriprocal agreement on income taxes.

Ask Slashdot?

[Tom7]

What the hell?

Ask a tax attorney, or just make something up and hope they don't catch you doing the wrong thing.

C'mon Cliff

[gmhowell]

Is the 'Ask /.' submission queue that bad? This is... really of no interest. This is what accountants are for.

Re:C'mon Cliff

[jayhawk88]

I think he probably just read the line "I've been working for a website development firm..." and figured it was good enough.

Re:C'mon Cliff

[geekindustries]

I agree. The latest ask /. articles have been lacking something...but what? OH! I KNOW! How about common sense??? I thought the "how do I travel with an LCD screen?" article was bad....

No Taxes at all

[Jerf]

In this situation, since you don't work and live in the same state, you pay no taxes at all on your income.

Or do you trust Random Slashdot Yahoo #17166?

Re:No Taxes at all

[Anonymous Coward]

Failure to notice sarcasm. 15 yard penalty, still third down.

How it works for pro sports athletes

[WIAKywbfatw]

IANAA (I am not an American) but I am a big NFL and MLB watcher. And I think that, along the way, I've spotted a potential answer to your question.

Obviously, MLB and NFL players are on the road a lot - one moment they'll be playing in California, the next they'll be in New York, then Texas and so on.

Now I'm not sure it's the case for NFL players (who will only spend eight or so days actively participating in their profession* outside their home state, where they'll play the rest of their games, train, etc) but it's true that MLB players (who will spend as much time on the road as they do at home) have to play state taxes where they are actually playing.

So, when Alex Rodriguez of the Texas Rangers plays a series in Oakland or Anaheim, then he has to pay Californian taxes on the relevant portion of his $25 million salary. When he plays a series against New York, then it's New York taxes he has to pay. And when he's playing at home, or at Houston, it's Texan taxes he's liable for.

The fact that he works for a Texas based organisation is irrelevant - the fact that he's physically doing his job in California, New York, etc is what's relevant.

In your case, I would assume that you would pay Ohio taxes for the time that you work from home and Indiana taxes for the time that you are in your parent office.

But, to quote Silence Of The Lambs, "When you assume, you make an ass out of u and me." It may be that, if you don't spend a significant portion of your time in Indiana, you don't have to worry about your occasional trips to the office.

Personally, I think you should clarify the issue with an accountant (doesn't the company have one that you can consult?) and even the relevant state authorities.

Good luck with your telecommuting. Hope it goes well. Don't forget to tell your friends that someone compared you to A-Rod...

(* I refuse to call it work.)

(** OK, so I lied. Work is a nice short word to use in this situation.)

Re:How it works for pro sports athletes

[Otter]

So, when Alex Rodriguez of the Texas Rangers plays a series in Oakland or Anaheim, then he has to pay Californian taxes on the relevant portion of his $25 million salary. When he plays a series against New York, then it's New York taxes he has to pay. And when he's playing at home, or at Houston, it's Texan taxes he's liable for.

I'm _fairly_ sure that you don't have that quite right. A number of states and cities do tax out of town athletes (I think California was the first to do it, taxing the Chicago Bulls after they beat the Lakers for the NBA championship), but that's on top of the state and local taxes where the team is based. It's one of the things that makes playing for Canadian teams undesireable, along with getting paid in loonies and the chronic danger of your team relocating to Phoenix or Denver.

Then I think a lot of people don't do it right

[barzok]

Let's assume what you said holds true. If my company sends me to another state for 2 weeks to do a server installation or LAN setup or whatever in another office of the same company, then I would have to pay the taxes for the 2 weeks worked in that other state. Fill out the proper tax forms for each state to start working there, etc.

But I don't think that happens. When I go out of state for my job, I'm still "on the clock" (I'm not a contractor, I'm employed by and do work for the company that pays me directly) as far as the company's concerned, but I don't pay that state's taxes on wages.

Re:Then I think a lot of people don't do it right

[kris_lang]

Yes, but this is only true because you are not getting noticed. The big league players with their big league salaries can be a significant chunk of revenues for cities and states, and the ensuing lawsuits can create big waves of publicity. This is why some of these taxes get enforced for the NBA players and the NFL and baseball (I refuse to call them Major League, and I refuse to insult true Little League by calling them LitLeague, but these soon to be striking bozos are by no means no way no how any sort of major league class) players. When they're getting millions a year and a single game may be worth a few hundred thou per player, then taxing that team's single game is a revenue source.

Taxing your $100-$200/hour over two weeks is not worth the effort of paperwork or revenue collection. Taxing their effective $30k - $40k per hour per player is worth the effort.

Re:Then I think a lot of people don't do it right

[WIAKywbfatw]

Let's assume what you said holds true. If my company sends me to another state for 2 weeks to do a server installation or LAN setup or whatever in another office of the same company, then I would have to pay the taxes for the 2 weeks worked in that other state. Fill out the proper tax forms for each state to start working there, etc.

But I don't think that happens. When I go out of state for my job, I'm still "on the clock" (I'm not a contractor, I'm employed by and do work for the company that pays me directly) as far as the company's concerned, but I don't pay that state's taxes on wages.

Re-read my original post. I made it clear that I wsa making an assumption, based on what I knew to be true of pro sports athletes. I even said it was likely that, if the proportion of your work that takes place out of state is not significant, then it might well be unimportant to the states' bean counters.

Two week's out of state isn't significant (when you're employed for 52 weeks), especially if you're not a large earner. But MLB players spend half theit playing time on the road (81 of 162 games) and earn an average of $2.35 million (give or take a couple of thou).

No offense intended, but I think it's fair to say that someone like Alex Rodriguez earns more for one game (over $150,000 in salaries alone) than you or I make in a year. So, while chasing the tax he should be paying for a three game series is a profitable use of a state employee's time, chasing you for a couple of hundred dollars (if that) isn't quite the same deal.

And, who knows, technically you might be liable for out of state taxes when you're on the road for your company. Have you actually checked the issue with your accountant or are you just guessing?

Re:How it works for pro sports athletes

[einstein]

well, here is a counter example. I live in PA, but work for a MD company, in MD. I pay PA income tax, and no MD income tax. so unless professional athletes get a more complicated deal, because they cover so many states, I think you're wrong. who knows. anyone actually an accountant around here?
---

Going there myself

[Pointer80]

I currently in the process of relocating (so my wife can finish her MS) to Illinois from the South... :)

Here's the scoop that my company's accountants and lawyers dug up. I'm not a lawyer or an accountant (insert the rest of the standard disclaimer here)...

Since I will be residing in Illinois, I will pay Illinois state taxes (and Chicago Income taxes as well :\). My employer had to get a tax id from the state of Illinois. AFIAK, that's all that was required in my situation.

My employer was even nice enough to transfer my health insurance into a group local to Chicago!

-pointer

Re:Going there myself

[netringer]

Here's the scoop that my company's accountants and lawyers dug up. I'm not a lawyer or an accountant (insert the rest of the standard disclaimer here)...

Since I will be residing in Illinois, I will pay Illinois state taxes (and Chicago Income taxes as well :\). ... AFIAK, that's all that was required in my situation.

You better check that advice really carefully. I live in Chicago, We don't have a city income tax.

There is a corporate head tax on each employee/year, which your employer won't have to pay, and various state, county, and city sales taxes that can get up to 8.75% on purchases.

In Canada...

[Sandman1971]

In Canada, taxes are based on your place of residence, and not your place of work. So if you live in Ontario and live in Quebec, you pay Ontario taxes. But special arrangements need to be made with the employer so that Ontario taxes are taken off your pay instead of Quebec taxes.

What they do is not really take off Quebec taxes, but adjust your tax rate so it about equals the Ontario tax. The province of Quebec then takes care of giving the province of Ontario the money you paid in taxes.

Here's how it works for me... I think

[MrIcee]

First... IANATA (I Am Not A Tax Attorney)... but...

I am part owner of a Software / Internet development house. It is headquartered in Indiana and the main office is there... however I am in Hawaii and run the Pacific Rim office.

Being a resident of Hawaii, I must pay Hawaii taxes on my earnings. Also, since Hawaii has a gross corporate tax, the company must pay that tax on any business that I get the company from Hawaii.

I do not believe (though I could be wrong) that I pay taxes to Hawaii on money made by the corporation outside of Hawaii, with the exception of my salary.

I think, however, that this is dependent on state laws of both where you work and where you live (eg., Ohio may, or may not have tax laws governing this, or additional taxes, etc... Hawaii does).

What we did, and what you should probably do, is find an accountant who is knowledgable in both Indiana and Ohio tax law... since they are neighbors, that should be pretty easy to do (especially if you look for accountants that are positioned near the border). For Hawaii / Indiana, it was a bit more difficult and we actually have two accounting firms, one here and one in Indiana who communicate back and forth to figure out what I and the company owe in regards to the various earnings and payments.

Border State Tango....

[NecrisRex]

I am not a tax expert, but I live in a small state (Massachusetts). There is an interesting thing here. New Hampshire (our nearest north eastern neighbor) has 0 (no, none, zero) income tax. Other border states (Rhode Island, Connecticut, New York, Vermont) do. Massachusetts has a high percentage of out of state commuters from these states. (Especially out of southern New Hampshire) The state figured it was getting ripped on income tax dollars so it set up a deal with the employers of out of state residents. If you work, OR live in Massachusetts you have to pay income tax. Up to the maximum collected in your home state, or the maximum collected in MA (Whichever is higher) Meaning if you live in New Hampshire (0% income tax) but work in MA you pay MA the 5% or so that they collect. I am not as familiar with the rates in other states, but if Rhode Island collected 3% you would pay 3% to Rhode Island and 2% to MA. But if Connecticut collected 8% you would only pay Connecticut's 8% (and provide proof of payment docs to your employer?). But, if you lived in PA and worked in MA, you would probably only pay PA taxes. It is not a border state, and therefore not part of this "agreement". Therefore, since Indiana and Ohio border each other, they could have ANY kind of kooky thing worked out, even paying full percentage in both states. So you might just want to check into your own scenario as closely as you can, and pony up the big bucks to H&R Block, that's what they are good at, and they will pay any fines, etc... Just my 2 cents, and I realize it may not be worth much, but these interstate commerce laws get really hairy really quickly. I'd definitely call in an expert or two. Later, NecrisRex

HIRE AN ACCOUNTANT

[topham]

HIRE A TAX ACCOUNTANT.

If you are part owner of the business, and the business is out of state you want, you NEED an accountant.

Beware deductions!

[bluGill]

First of all, get an accountant or to handle the details. I believe in do it yourself, but if you have to ask this question, it means that you either don't have the time, or don't want to find out the details the hard way. (Nothing wrong with that, you have a job to do, and you can probably make more money doing your job than you would save by not hireing a pro)

Now that I've said that: you don't nessicarly want to take all deductions you can. For instance you can deduct your home office space from your taxes. However when you deduct that space (beyond all the rules for using it, which I assume you can follow), you pay more when you sell the house because the part you deducted you owe taxes on, while the rest of the house you don't owe taxes on. (subject to certian rules you don't pay taxes when you sell a house that you lived in)

Note, tax law is extreemly complex. You have in your situations many deductions you can take, but some will be counter productive in the long run. Worse yet, they change the law from time to time, so you might decide to take or not take a deduction, only to discover latter that you should have done it the other way. (In the house example, if most people telecomut in the future odds are you could have it both ways)

Good luck. Your situation is extreemly complex, what is right for you could easially be wrong for everyone else. You either get to study the tax code in detail, or hire someone who hopefully knows it well enough to get the right details for you.

That is a good question.

[zbowling]

I used to live in Indiana and still service people there. (Yet my customers there are so small in comparison to the rest of my work, it is not even worth it to worry for me) There really could be a lot of loop holes so I dunno what to tell you. Lots of people do it, I'm sure. I would check Google and do a search for "out-of-state" "Indiana" and "tax issues".

Don't Panic!

[sysadmn]

You have nothing to worry about. I live in Cincinnati. Mark Twain(!) noted that if the world were going to end, he'd want to be in Cincinnati, since everything arrived there 10 years later. So you've got 10 years before the taxman knows you're here.
Better yet, a newspaper columnist noted that Cincinnati was once the very model of 19th Century German Liberalism - and still is! Heck, they didn't even HAVE income taxes in the 1800's!

stop being a dick

[Lord Omlette]

If you have a virtual office than you can pay the $200 to have HR Block tell you exactly what to do, not the mention that they will insure their advice for a certain amount ($4k for individual, more for other accounts I guess).

You come to slashdot when you need advice on stuff that's fun, NOT stuff that will land you in jail if dick up.

Get a lawyer. Now. By asking slashdot about TAXES you've already proved that you are incompetent and likely to be Darwin-ed out of the game.

Clarification on original question

[Silas]

Thanks to all who have responded so far. Most of the responses have been along the lines of "Get a lawyer, get an accountant". Others have decided to be nasty and called me a dick [slashdot.org] for asking or claimed that the question isn't of any interest [slashdot.org].

To clarify a few things:

• I've already got a lawyer and accountant working on the issue for me.
• I will defer to their counsel in almost all cases.
• On some issues, they've indicated that I have a choice about what particular path I take.
• Given that the Slashdot population as a whole has more experience (anecdotal though it may be) than my particular lawyer and accountant do on this topic, I thought it would be interesting to see what others have done in similar situations
• I appreciate the responses with positive, relevant insights.