How to determine if you need to file a state income tax return

Ro Williams
By Ro Williams

Figuring out which states you are required to file an income tax return in can be complicated.

Filing income taxes as an individual was pretty straightforward pre-covid. Now with different factors attributing to someone’s income, it’s as complicated as ever, especially when filing your business tax returns. Cutting through all the gunk, we’re going to give you four factors in determining if you owe taxes in a state.

#1 - Residency (domicile)

States vary on what determines if someone is a resident, but generally the laws revolve around the 183 day rule and where your permanent home is located.

183 Day Rule: Spending more than 183 days in a state will render you a statutory resident and could leave you on the hook to pay taxes in that state. This can be true even if you work elsewhere or have an eCommerce business.

You can be a resident of more than one state, but you can only be domiciled to one. Typically, the state with your permanent home is where you’re domiciled. Residency can be broken into three different buckets: full-time resident, part-year resident, or nonresident.

#2 - Business presence 

You can think of business presence like a catchall. Business presence can be where your business operationally is located, where your employees are located, or just a place where you sell your goods, products, and or services.

#3 - Income

States generally use the source rule or worldwide income rule to determine if someone is doing business in a state. If you have directly earned income or the origination of a business transaction occurred in a state, under the source rule, it will be deemed that your business is “doing business” in that state. Under the worldwide income rule, if you are a resident or part-time resident of a certain state, then you are required to pay taxes on that income. If you have made income from doing business in a state, then you are likely to have to file an income tax return.

#4 - Business entity structure

Corporations are often required to file a tax return in a state, while other structures, such as a sole proprietorship or single-member limited liability company are not.

For example, in California, corporations are required to file a California Corporation Franchise or Income Tax Return, Form 100, even if the business did not have income. However, a sole proprietorship with no income is not required to include business information on California Resident Income Tax Return, Form 540. 

As always, if you can’t find your way to determine if you have to file state income taxes for your business in a particular state, you should reach out to your tax professional.

Ro Williams
By Ro Williams
Ro Williams J.D, MBA, is a part of the tax research team at ComplYant, a technology platform offering business owners and entrepreneurs a simple way to manage tax rules and requirements. Ro is an experienced professional in the tax industry and has previously held positions at an International Law firm and Public Accounting firms.

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