My crews work in three states. What do I owe where?
Crews working across state lines generally create obligations in each state where the work happens. You usually must register to do business, withhold each state's income tax on wages earned there, and apportion your company income among the states based on where the work occurs. Sales or gross-receipts taxes on the jobs may also apply. Each state where a crew works can expect a return.
Key points
- A crew physically working in a state creates income tax nexus there, so the contractor generally files a return in each state where crews work.
- Wages are taxed by the state where the labor is performed, so the employer withholds each state's income tax on the pay earned there.
- Most states require an out-of-state contractor to register as a foreign entity, and often to hold a contractor license, before starting a job.
- Company profit is divided among states by each state's apportionment formula, which typically weights sales and sometimes payroll and property.
- Whether a construction job carries sales tax, and whether the contractor or the customer owes it, depends on the state and how materials are treated.
What does a contractor have to register for in a new state?
Physical work performed in a state is among the strongest forms of nexus, so each state where a crew mobilizes can expect the company to register, file, and pay. Registration usually begins with a foreign entity qualification through the secretary of state, followed by accounts with the revenue department for withholding, sales or use tax, and income or franchise tax.
Many states and localities also require a contractor license, a job-site registration, or a bond before work begins, and some require a nonresident contractor to post security or have the project owner hold back a portion of contract payments. Working without these can stall payment, invite penalties, and weaken lien rights, which is why a construction attorney typically handles licensing while the CPA handles the tax accounts.
How is payroll withholding handled for crews that move between states?
Wages are sourced to the state where the labor is performed. The employer withholds each state's income tax on the portion of an employee's pay tied to work done in that state, which for a crew that crosses a state line mid-week means splitting a single paycheck between states based on days or hours worked in each. Daily location records are what support that split if a state audits.
A handful of states allow a de minimis number of days before withholding is required for nonresident employees, and reciprocity agreements between certain neighboring states let commuters pay only their home state. State unemployment insurance is owed to a single state per employee under the localization rules, generally where the work is based, so the same records drive both withholding and unemployment reporting.
How is company income divided among the states?
With income tax nexus in several states, profit is apportioned among them under each state's formula. Most states now weight sales heavily or exclusively, and for a contractor the job site generally determines where the sale is sourced. Some states still weight payroll and property, which for a construction company also track the job site.
The result is that a business earning in three states files income tax returns in all three, with apportionment meant to keep the same dollar of profit from being fully taxed by every state. Because states use different formulas, the apportioned shares rarely add up precisely to the whole, and long-term contracts may require a specific accounting method, such as percentage-of-completion under IRC §460, that affects which year the income lands in each state.
Which taxes apply to the job itself, and what are the limits?
Sales and use tax treatment of construction is set state by state. In many states the contractor is treated as the consumer of materials and pays tax on purchases; in others the contractor collects tax from the customer on the improvement or on separately stated materials. A few states impose a gross-receipts tax on the contract price. The treatment has to be confirmed before pricing the bid, because guessing wrong comes out of the job's margin.
The obligations only arise where crews actually work. A contractor that bids in a state but never mobilizes, or that merely delivers materials across the line without installing them, generally has no filing requirement there. Track where each crew works and for how long, register before mobilizing, and settle the transaction-tax treatment before the first invoice.
Related strategies
People also ask
- Do I owe taxes in states where I don't have an office?
- What happens tax-wise when I hire a remote employee in another state?
- Which accounting method should a construction company use?
- What tax strategies apply to a trucking or fleet business?
Sources
Related guides: construction, logistics fleet
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
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