Tax allocation for RVers working in more than one state can be tricky, according to CPA and tax attorney Martin Shenkman, who continues with his series on state income tax issues for work campers.
Tax Math 101: Figuring out How Much Income Each State is Entitled
by Martin M. Shenkman, CPA, MBA, PFS
Part four of article series on state income tax issues for working campers and RVers.
Before my first RV trip, I watched a video called "RV's 101." Well, consider the following tax math 101. But, regular math is easier (and I really didn't love math, and it didn't love me). You see, in math, 2+2 = 4. But, in state tax math 2+2 could = 5! How? Because the rules differ from state to state. You can actually get snared into reporting the same income in more than one state. Again, as repeated in many articles in this series, knowledge, planning, and good records are your best defense.
If you don't like math, this won't be a fun article, but hey, who ever said taxes were fun. But, there is good motivation. If you do it right you can save a bundle, avoid an audit, and sleep better at night. Dust off your calculator.
Allocating Income or Wages to Each State
If you have a business or work as an employee or consultant for a company, you'll have to allocate your earnings between the various states in which you worked. In many situations the calendar or log book recommended previously is essential, and will provide the basis for what you need. The results might sometimes be surprising.
Example: Nat Moore was a wide receiver for the Miami Dolphins and went to Buffalo, New York, for a one day a year visit to play the Buffalo Bills. That's what football players do. One day! New York audited Moore and took the position that since he played 16 games in a year, his salary should be divided by the number of games so that 1/16th of his income should be taxable in New York because he paid 1/16th of his games in New York. Needless to say this was not a position Moore was particular fond of and he fought the New York tax authorities. The New York Court upheld the position of the New York tax authorities for the tax allocation.
Example: You work/travel for a company as a rep visiting their offices in perhaps 20 different states a year. You spend twenty-five days in State X visiting their plant. Let's say they paid you $50,000 for the year. So, you do the math: [25 days worked in State X/365 days in the year] x $50,000 = $3,425 taxable in State X.
Wait a minute. Do you work Saturdays, Sundays, Christmas Eve? Got the picture? The State X tax authorities might prefer the following tax allocation:
[25 days worked in State X/210 work days in the year] x $50,000 = $5,925 taxable in State X.
That changes the picture. But, just like those late night cable TV ads (don't ya just love'em)…there's more.
The State X tax authorities might take the approach the New York tax authorities did in the Moore case and ask you to produce records of the number of days you actually worked providing consulting services to your employer. Perhaps you only worked 125 days in the year, spending other "work" days driving from one location to another. The State X tax authorities might just say that the driving time was not work time (you could have flown; you just chose to drive an RV).
Planning tip: It might be very important what your contract with your employer says. If the contract makes it clear you're working for them while traveling between their customers' locations, then you might beat the above tax auditor argument.
So they might argue for the following allocation of your income to their tax system:
[25 days worked in State X/125 actual days worked for your employer in the year] x $50,000 = $10,000 taxable in State X.
If the tax rate is 10% that is a noticeable difference:
Tax Allocation 1: $3,425 x 10% = $343.
Tax Allocation 2: $5,925 x 10% = $593.
Tax Allocation 3: $10,000 x 10% = $1,000.
What could be more costly and difficult is if different states you work in have different ways of allocating wages. You could end up having to double count some.
W-2 Wages Not So Simple To Allocate
If you're an employee your employer must report your wages to the IRS on From W-2 and give you a copy. If you change your residence for tax purposes during the year, or have to make the tax allocations illustrated in the previous section, there can be another hurdle or issue you face. The figure on Form W-2 is often a composite of a couple of numbers.
Most states tax you based on the year you received income, but there are exceptions.
Martin M. Shenkman, CPA, Esq. sponsors a free legal website LawEasy.com.
Martin is an RVer with a special cause. He is an avid fundraiser for the National Multiple Sclerosis Society and The Michael J. Fox Foundation For Parkinson's Research. Besides RV business tax and legal information, he will share some of his RVing and fundraising experiences with us.
Caution: This article and other columns can never substitute for professional legal, tax, and accounting guidance. These columns can provide only broad general advice, which may not apply to your situation. The rules differ substantially from state to state. Tax, business, and other laws change rapidly over time so there can be no assurance that the information in this column is current. The best approach is to review the ideas in this article with your own CPA and attorney. The application of general tax and legal principles to some of the unique facts presented by RV working is particularly complex and there is little specific law providing guidance to rely upon.