Most of the time, the income taxes discussed here are federal rather than state, for two straight-forward reasons. First, federal tax law is vastly more comprehensive and subtle than any state’s tax law, so there is more to talk about. Second, most states use the income figure from your federal return (either taxable income or adjusted gross income) as the starting point in their tax calculation. There are plus and minus adjustments to reflect the state’s particular income and deduction rules, but generally your federal income is the most important factor in determining your state tax.

But more state tax questions have been coming across my desk lately, typically in the form of "Do I really have to pay tax to [pick a state]?" The answer is almost always "Yes."

Performers have always been much more likely to need to pay taxes to multiple states than the average person. This year, I have prepared tax returns for more than 30 different states. Very few people pay tax to a state they don’t live in unless they are forced to, generally by having taxes withheld for that state. Two interrelated trends will only serve to increase the need for multiple state filings. First, many states are becoming increasingly aggressive about identifying nonresidents who worked in those states and collecting taxes. Second, as the film and television businesses consolidate (and, indeed, as large companies like Disney or Clear Channel Communications increasingly control touring theatre), these employers are more likely to be meticulous about changing the state for which tax is withheld as work moves from one place to the next. It’s much harder to fly below the horizon of state taxes.

The Basic Ideas

The general rule of state taxation is that income is taxed where it is earned. If you do a play in Cincinnati, you will owe Ohio income tax. If you make a commercial in California, the compensation is subject to California income tax even if it is paid years later in the form of residuals. Basic, straightforward law, confusing only in those esoteric cases when it is unclear exactly where the money was earned. (But if you actually have a first dollar gross participation in a film shot in three states, you almost certainly also have good tax counsel.)

There is a second general rule: The state that you live in will tax all of your income, whether earned in-state or out-of-state. Combining these general rules would seem to mean you pay double tax, to the work state and to your resident state. But while your worldwide income is included in the tax calculation by your resident state, they will give you a dollar-for-dollar credit against your resident state tax for the tax paid the work state.

States give you credit only to the extent of the duplicated tax, which may be less than the tax paid the other state. Illinois, for example, has a three percent tax on all income; Massachusetts has a 5.95 percent tax on wage income. An actor paid $1,000 in Boston will pay $60 in Massachusetts tax, of which only $30 will offset Illinois tax. In short, you pay the higher of the two tax rates.

The Big Exception

The second general rule has an important exception. Many states have reciprocal arrangements with nearby states not to tax the wages of each other’s residents. Typically, these treaties are made where many people live in one state and work in another. Illinois, for example, has reciprocal arrangements with Wisconsin, Iowa, Kentucky and Michigan. Not every pair of adjoining states is willing to do this, because these treaties can shift tax revenues between states. For example, more people live in Indiana and work in Illinois than the other way round, and Illinois was losing tax revenue—enough so that Illinois ended the reciprocal arrangement a few years ago. The same imbalance occurs between Illinois and Wisconsin, but rather than inconvenience taxpayers, Wisconsin sends Illinois a check each year to equalize the effect.

Maybe You Should File Even If You Don’t Have To

Every state sets its own rules of how tax is calculated on non-residents’ income, and how much you must earn in the state before you are required to file. (There are patterns, but no standards.) Minnesota, for example, requires you to file only if your gross income from that state is over $7,200; Ohio, in contrast, requires you to file from the first dollar of income, even if there is no tax.

But you might want to file anyway if you have W-2s showing tax withheld for a state where you aren’t required to file because that’s the only way you can get the money back. If it’s a dollar or two, who cares. Sometimes, though, these are significant amounts of money: If you had $6,000 of Minnesota income, there could easily be $500 of withheld taxes.

Illinois residents who work in a reciprocal state can head off this problem by having a heart-to-heart talk with the out-of-state employer’s payroll department before the first paycheck is issued. Some of them aren’t aware of the rules; others simply assume you are local unless you tell them otherwise.

Be aware that employers in these reciprocal states probably will not withhold Illinois tax. They don’t have to unless they also operate here, and few will go to the bother of the filings and paperwork as a courtesy to workers. Similarly, having significant income from a non-reciprocal state but no tax liability there (like the Minnesota example above) can create a similar problem. With no Illinois withholding on this income and no credit for taxes paid the other state, you could well owe Illinois tax on April 15, or have to make estimated tax payments during the year to avoid a penalty.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or 773/525-1778 (888/525-1778 outside the Chicago area).

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.

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