Paging Dr. Double Tax: When Two States Want a Cut of Your Income

It’s not just college teams that compete across the border.

When you’re a physician, consultant, or small business owner with income that crosses state lines, the rules start to feel like an interstate turf war.

Each state wants its cut — and unfortunately, they’re not always good at sharing.

Here’s how to stay compliant (and keep your sanity) when you earn money from multiple states.

1. Your State of Residence Taxes Everything

Your state of residence is like that friend who insists on picking up the tab — except they want your money.

It will tax your worldwide income, no matter where it’s earned.

That includes W-2 wages, 1099 income, rental income, dividends, or stock gains.

If you live in Kansas, California, or New York, those states consider everything you make taxable, even if you never set foot there during the year.

2. Other States Tax the Income Sourced to Them

Now for the double whammy.

If you earn income in another state, that state can tax the portion that’s considered sourced to them.

For example, if you’re a locum tenens physician living in Kansas City, KS, but you work 1099 shifts across the border in Kansas City, MO — Missouri will tax the income earned within its borders.

That means you’ll file a nonresident return for Missouri, pay Missouri tax on that portion, and then your home state (Kansas) will give you a partial credit to offset it.

It’s not exactly fair, but it’s the system we’ve got.

3. What Counts as “Income Sourced to a State?”

Let’s start with what doesn’t count.

Investment income — things like interest, dividends, and capital gains — is only taxable by your state of residence.

It doesn’t matter where your broker is located, or where the company you bought stock in happens to be headquartered.

But earned income (W-2 or 1099) is another story.

If you perform work physically in another state, that income is considered sourced to that state.

So, if you’re a locum doc based in Kansas City, KS, working a hospital shift in KCMO, you’ll owe Missouri tax on that income — even though you live right across the river.

The same applies to real estate income. If you own a rental property in another state, that state gets to tax the rental income. That’s why passive investors often end up filing multiple state returns — each property means another potential filing obligation.

4. The S-Corporation Twist

If you operate as an S Corporation and perform services in multiple states, the rules get more complicated.

Let’s say you live in Arizona but take on-site contracts in California.

Because you physically work there, you must run payroll for yourself in California during those assignments — paying both employer and employee payroll taxes to the state.

That’s a surprise to many physicians who elect S-Corp status. While the S-Corp can save you self-employment taxes overall, it also means you may have to register, run payroll, and file in multiple states — a real headache for locum tenens physicians bouncing from contract to contract.

5. The Telehealth Gray Zone

Then there’s telehealth — the newest frontier of state tax confusion.

If you’re a 1099 telehealth physician working remotely from Texas but seeing patients in California, who gets to tax that income?

Under market-based sourcing (the method most states now use), the income is sourced to the state where the patient is located — not where you’re sitting. So, California considers your services “performed” there and wants its share of the S-Corp income.

But payroll (your W-2 wages) is still sourced to Texas, because that’s where you physically perform the work.

Some states, however, use a cost of performance method — focusing on where the work was performed rather than where the customer or patient is located. Those states are generally more favorable for telehealth practitioners.

Unfortunately, the definitions are evolving, and each state interprets them differently. This is one area where it really pays to have a tax advisor familiar with your specialty and your work footprint.

6. Paying Tax to Two States — or Just One?

The good news: you usually won’t be taxed twice on the same income.

Your resident state gives you a credit for taxes paid to another state.

The bad news: that credit is usually the lower of (A) the tax you paid to the other state or (B) the amount your resident state would have charged on that income.

Translation: Heads they win, tails you lose.

If you live in a low-tax state but work in a high-tax state, you’ll pay the higher rate.
If you live in a high-tax state and work in a low-tax state, your home state will make up the difference.

So if you’re a California resident who thinks you can avoid the “Sunshine Tax” by working a hospital shift in South Dakota — think again.

If you’re paying California tax, at least enjoy the beaches while you do it.

7. Exceptions and Complications

There are always exceptions:

• Some states have reverse credit agreements (the nonresident state gives the credit instead of the resident one).

• Others have reciprocal agreements for border commuters.

• And a few have nasty “convenience of the employer” rules — where even remote employees owe tax if the employer’s office is in that state.

Each rule is a little different, and the devil is in the details.

8. Your Action Plan

A. Track your income and expenses by state.
If you do locums or telehealth work, keep records of where your services were performed or where your patients were located.

B. Estimate taxes during the year.
Many states require quarterly payments from nonresidents.

C. Do your homework before you start work in another state.
Check how both your home state and the new state handle dual-state taxation.

D. If you establish a business presence, register properly and confirm whether payroll is required.

TaxSmart Takeaway

Working in multiple states can create opportunities — but also tax traps. Each state sees your income as an open invitation.

The key is to understand how your home state, your work states, and your business entity fit together.

With a little planning (and a well-informed advisor), you can keep your compliance smooth — and your tax bill as healthy as your patients.