LocumLife - February 2009 - (Page 6)

RESOURCES Money Matters Tax, financial, and insurance issues State tax issues for multi-state locum tenens professionals Once you obtain a license to practice in another state and begin accepting temporary contracts, you not only increase your practice options, but also add another income tax return. Joseph Smith hile having income from multiple states brings a level of complexity to filing, there are steps you can take to keep things from becoming too daunting. BASIC FACTS To begin with, understand some tax basics. Income is taxed at its source and at its destination. Each state has a right to tax income or profits earned within its borders and requires reporting of the income to its respective state tax agency. At the same time, your resident state has the right to tax not only the income you earn within its borders, but also any worldwide accession to wealth, including income. Initially, it seems as if the income is being taxed twice; however, your resident state will allow credit for taxes paid to the other states, based on the formula that the resident state uses to calculate income tax. This same procedure holds true on the corporate level if you are operating under a “C” Corporation structure and holding profits in the company. In effect, you will pay the higher of the two tax rates, even though portions may go to different states. For example, if you live in a state that has a 5% tax rate but provide coverage in a state with a 3% tax rate, then the 2% difference will be made up either on the tax return or as an estimated payment during the year. If the opposite were true—accepting an opportunity in a state with a 5% rate and a home state with a 3% rate— then the 5% paid to the other state will zero out the tax liability in the home state on that income. Out-of-state tax credits never exceed the tax liability that the home state imposes. RECIPROCITY AND REVERSE CREDITS Also realize there are exceptions to this rule. Some states have agreements treating income earned by a border state resident as earned in their state of residence. An example of this is the agreement that Wisconsin and North Dakota have with Minnesota. As a resident of Wisconsin, any employment income earned in Minnesota is deemed to be earned in Wisconsin and vice versa. There are also “reverse credit” agreements among Indiana, Virginia, California, Arizona, and Oregon. In these cases, the nonresident state will W allow a credit for tax paid in the resident state. ALLOCATING EXPENSES Understanding how to allocate expenses to the various states where you have served as an independent contractor is also very important. What makes this step so challenging is that there are two types of expenses to consider. First, you have expenses directly related to income earned in the nonresident state. Examples include meal per diems, lodging, license fees, and transportation expenses to the opportunity. These expenses are entirely associated with the coverage you provide in a particular state. Second, you have expenses that are applicable to all opportunities. Thinking of these costs as “overhead” might be helpful. These are expenses that you have regardless of the place in which you provide coverage, and include costs for such items as uniforms, reference manuals, and equipment. These expenses can be allocated to the individual opportunities based on income or some other predetermined method. For example, suppose I spend $100 on scrubs in a calendar year and I make $25,000 in state #1 and $75,000 in state #2. Seventy-five dollars of the $100 will be allocated to state #2 and $25 to state #1. Keep in mind, however, that this arrangement only applies to nonresident www.LocumLife.com RESOURCES Internal Revenue Service http://www.irs.gov/eﬁle/ article/0,,id=130684,00.html Tax Foundation http://www.taxfoundation. org/research/topic/9.html U.S. Census Bureau http://www.census.gov/ govs/statetax/05staxrank. html 6 LocumLife FEBRUARY 2009 http://www.irs.gov/efile/article/0,,id=130684,00.html http://www.taxfoundation.org/research/topic/9.html http://www.census.gov/govs/statetax/05staxrank.html http://www.LocumLife.com

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LocumLife - February 2009 Editorial Insights Contents From Nalto Stat! Money Matters Resources Last-Minute Luxury Opening the Door Med Ec-cerpts Winning the Battle Career Center Advertisers' Index Opportunities Direct Residency Corner Destinations Contest Rules Anyone's Guess La Vita Locum

LocumLife - February 2009

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