Locum/relief work is becoming more common in veterinary medicine across the country. And while locum/relief work can certainly come with its’ fair share of benefits (higher pay rates, more control, opportunity to travel) one of the downsides associated with this type of work is increased tax complexity. Living in one state and working in another or earning income in multiple states can make the most routine tax situation seem overly complex.
First things first, all US taxpayers pay both federal and state taxes. There is only 1 federal government, but 50 state governments. Regardless of where you earn your income, your federal taxes will always be subject to federal tax law and earning income in multiple states will have no impact on how you file your federal tax return or the federal tax liability you pay. This is true whether you are a W2 employee, 1099 contractor, or a partner/owner in a veterinary practice.
When it comes to state taxes however, your situation becomes a bit more muddled.
As mentioned above, each state has their own tax laws and regulations. Understanding the nuances and filing requirements of 50 states is very difficult, and certainly not something that can be properly described in this article. So before we go any further, if you earn income in multiple states or live in one state but work in another, it is advised to do your due diligence on these states tax laws and/or employ the assistance of a qualified tax preparer to keep you informed.
How State Taxes Work
Most likely you will pay state taxes in the state in which you reside regardless of where you work. So if you live in Illinois and work in Illinois, you will only need to file an Illinois state tax return. However, if you live in Illinois but work in Indiana, you will most likely have to file a different state tax return for both states, a resident state tax return for Illinois and a non-resident state tax return for Indiana.
But Won’t I Be Taxed Twice?
No. Fortunately, Congress passed legislation in 2015 that forbids double taxation. One way some states reconcile this is through what is referred to as reciprocity agreements. Basically through these agreements, you can live in one state and work in a neighboring state without paying taxes there. Instead of paying taxes where you work, you will pay taxes in your resident state, which is the state where you live.
For example, Illinois and Michigan have a reciprocal agreement. If you live in Illinois but work in Michigan, you pay your tax to Illinois where you live. Michigan will not (should not) withhold any state taxes from your paycheck. Of course errors do occur and if you do have state taxes withheld in a state you are not a resident that has a reciprocal agreement, you may want to file a non-resident return to get the money back that was withheld.
If no reciprocity agreement exists, such as the case for Indiana and Illinois, then you will file a resident state return for Illinois(the state you live) and a non-resident return for Indiana (the state you earn income). But you will still not be taxed twice. For example, assume a relief vet lives in Illinois and earns $100,000 working in Indiana. Illinois has a flat tax rate of 4.95% (in 2021) and Indiana has a flat tax rate of 3.23% (in 2021). Since you work in Indiana, you will owe $3,230 ($100,000 * 3.23%) in taxes. Since your live in Illinois, you will owe $4,950 ($100,000 * 4.95%).
So how do you avoid double taxation?
Your resident state, in this example Illinois, must provide a means such as a tax credit to reduce your tax liability by the amount of taxes you had to pay your non-resident state.
Typically you will file your non-resident state tax return first, in this case Indiana, which shows a $3,230 tax due. Then when you file your Illinois state tax return, the $4,950 you owe will be reduced by the amount you owe in Indiana, resulting in Illinois state tax of $1,720. So you are still paying $4,950 total between the two states, but you are not being double taxed. By moving to Indiana you may be able to save $1,720 every year in state taxes.
It is important to understand residency laws and state tax reciprocity agreements when you earn income in multiple states or live in one state but work in another.
Locum/Relief Work in Multiple States
When working locums/relief work in multiple states that requires moving, it is advised to work with a tax professional who can assist navigating different state tax law but also determining which state would be considered your home state or ‘domicile’. Filing multiple state tax returns may be necessary and emphasizes the need of keeping detailed records as to where income was earned, which deductions (such as mileage) are tied to which state, etc.
Where to Look For Help?
Speak with other industry colleagues and look at veterinary specific organizations (AVMA, VetPartners, Veterinary Financial Advisor Network) for professionals who may be able to help or who are connected to other professionals to which they may refer. By delegating this immense task you are able to focus on what you do best.
Andrew Langdon is a CERTIFIED FINANCIAL PLANNER™ and the founder of VetWorth, a fiduciary fee-only financial planning firm dedicated to serving the unique needs of veterinarians and their families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.