Sole Proprietor with Out-of-State Client - Other State Filing?

[Michael16]

I'm a small business owner and my main client is located out of the state from which I conduct my business. The vast majority of my work (greater than 90%) is conducted in the state in which I operate, with only occasional travel to my client that comprises nominally a few weeks a year. Do I need to also file state income out-of-state (in this case, Florida, which doesn't have an individual state income tax but does have a corporate income tax)?

[MaryK4]

You are correct that you may have a state filing requirement if you perform work in another state for your self-employment.  As a sole proprietor, you would not be required to file a Florida Corporate Tax return.  There is a Tangible personal property (TPP) that applies to Sole Proprietors, (TANGIBLE PERSONAL PROPERTY) but that would be for property located in Florida, and the exemption amount is quite generous.  

[Michael16]

To be clear, this pertains to any client paying me from a state other than my own? If, for example, I receive a 1099-NEC from a client located in Arizona or California, I would also need to file in those states, even if I performed the work from the state in which I operate and reside (with no property owned in those states)?

[GeorgeM777]

Generally, where you perform the work for which you are compensated controls which state has the right to tax your income.  Your resident state will always tax your income (unless you live in a state without an income tax) and may also provide a credit for taxes paid to a non-resident state for income taxed by the non-resident state.

If you perform services for a client in California, you may owe tax on the compensation you receive from the client even though all of the work you performed was done outside of California.  Here is a FAQ from the CA Franchise Tax Board that addresses the issue you have raised.

Scenario 4:

You are an independent contractor/sole proprietor who relocates to another state. In addition to obtaining customers in your new state, you still perform services for California customers who receive the benefit of your services in California. Will you need to file a California return?

Answer: Yes.

California source income for independent contractors/sole proprietors is determined by looking to where the benefit of the service is received by the customer. The location where the independent contractor/sole proprietor performs the work is not a factor. Visit Market-based sourcing for independent contractors for more information.

CA Franchise Tax Board

@Michael16

[Michael16]

If completing my tax forms through TurboTax, is it best practice then to download tax forms for each state in which I conducted business? This can be a bit of an expense if I have multiple states. I do wish it were clearer which states might require filing.

[ErnieS0 · Accepted solution]

You don’t say whether you are using TurboTax Online or TurboTax CD/Download. When you mention download, I’m assuming you are using TurboTax CD/Download. You will have to pay for each state whether you use it or not, so I would not recommend that.

You can create a dummy account in TurboTax Online and use totals and then prepare the nonresident states. If there’s a balance due, download that state in CD/Download and file it.

TurboTax Online is free if you don’t file, so you can try it before you buy.

Another option is to check the filing requirements for each state. TurboTax has links to all the state websites at How do I track my state refund?

Finally, you may want to file in every state where you receive a 1099-NEC. The states only see the gross amount, so they may assume you crossed their filing threshold because they don’t know what your expenses are. Filing all states could save you hassles later.

[Carl]

For Florida, if your business "maintains" a physical presence in the state, it needs to be registered with the Florida Division of Corporations at https://dos.myflorida.com/sunbiz/ 

You'll pay a "registration tax" every year, when you renew the registration. If you don't maintain a presence in the state, then nothing to do. Otherwise, be aware that the late filing fees are $$$HIGH$$$ if you miss the filing deadline any year. For LLCs and corporations the deadline is May 1st each year. you'll pay the late filing fee if registered after May 1st and before Sept 30th.  After Sept, the business is administratively dissolved by the state, and reinstatement costs are exorbitant.

[Michael16]

A small client of mine is located in Virginia. I received a 1099-NEC from them, but all work performed was remote (in other words, none of the work was done physically in Virginia, but rather done in my residence/business state). According to Virginia's nonresident income tax form 763:

"Income from Virginia sources is income received from labor performed, business done, or property located in Virginia, including gains from sales, exchanges or other dispositions of real estate and intangible personal property having a situs in Virginia. Virginia source income includes income passed through from a partnership, S corporation or limited liability company that does business in Virginia."

My read on this income received by a Virginia source for work performed outside the state wouldn't require a state filing. I've already included this income in my residence state taxes.

If this income isn't considered Virginia income, I assume I answer no income was received from this state in TurboTax?

[JosephS1]

If your presentation of your income received is as you described, then yes I would agree that there is no need to file a VA tax return.  You may have performed services for a VA taxpayer/Company but you yourself did not perform those services in the Commonwealth of Virginia.  If you had a physical presence in VA the situation would be different but since you apparently do not there is no need to file a VA Non-Resident Return.

Based on your statement and the instructions for VA Non-Residents, again I do not believe you need to file a VA Non-Resident return.

VA Nonresident Instructions

@Michael16