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Small Business Guide

AUGUST 3, 2000

SMART ANSWERS

How Taxing Is It to Have Out-of-State Clients?
It depends on how much work you physically perform outside your resident state


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Q: I run a grant-writing business for nonprofit groups. Two of my clients are from Rhode Island and Connecticut. How do I deal with taxes for income from those clients? I work from a home office and write my own contracts.

-- Sarah Brophy, Carlisle, Mass.
A: Experts say your federal income tax return won't be affected, but you do need to think about state taxes. If you perform all of your services in your state of residence, all of your income will be taxable in only your home state because you work as an independent contractor from a home office.

Unless you have an office established in one or more of the states where your clients are, you probably don't have "nexus" in those states, says Steve Kunkel, a CPA and financial planner with Duitch Franklin Business Services in Los Angeles. "Nexus is the minimum connection that a state must have in order to subject a taxpayer to taxation. Each state has different interpretations of nexus, and so you should check the rules for the specific [ones] involved in your own situation," Kunkel says.

Typically, physically doing work in other states will require that you file taxes there, says Jan Zobel, an enrolled tax agent based in San Francisco. "If you wind up being taxed in more than one state on the same income, you'll generally be entitled to take a credit in your resident state for the [out-of-state] tax," Zobel says. And you shouldn't have to worry about sales tax. Generally, states don't impose them on services unless they're bundled with a tangible product.

For more information on these topics, you might check out Zobel's book, Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping (Adams Media Corp.), available from Amazon.com for $8.76 plus shipping. The Internal Revenue Service has a Web site dedicated to tax information for businesses at: http://www.irs.gov/bus_info/.

Have a question about running your business? Ask our small-business experts. Send us an E-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


By Karen E. Klein

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