April 27, 2022
Is your private therapy practice moving to a different state? Good news: The IRS doesn’t care.
Moving your business to a new state doesn’t have a big impact on federal taxes. However, it does have an impact on state taxes—like which ones you need to file, and whether you’re liable to pay taxes in your new city or county.
Each state has its own tax laws so you’ll need to do a little bit of your own research to understand details particular to your situation. But this article covers all the changes you need to be ready for, so you can be sure you’re asking the right questions from day one.
The IRS is not totally indifferent to your move. They still want to know where you live.
For the sake of receiving correspondence from the IRS (including tax refunds), they need your address on record. In the hustle and bustle of moving, it’s easy to forget this detail.
If you still haven’t filed taxes this year, you can change your address with the IRS simply by entering your new, current address on your tax forms when you file. The IRS will record the changes, and you’ll receive all correspondence at your new address.
If you’ve already filed taxes this year, the first step to take is notifying the post office that served you at your old location, so they can forward IRS correspondence to your new address.
It’s wise to take care of this ASAP. An out-of-date address on the IRS files could mean you miss important correspondence relevant to your business, or leave your tax refund waiting in limbo.
The IRS also requires you to directly notify them of the change. You can do so by filing Form 8822 (if your business doesn’t have an Employer Identification Number) or by filing Form 8822-B (if it does).
It may feel intimidating, facing down a whole new set of taxes in a brand new state. But the changes you need to prepare for can be broken down into five categories:
Set aside time to tackle each one, and you’ll have your tax planning up to date ASAP.
While federal income tax is the same wherever you live, state income tax levels and brackets vary widely. Some states don’t even collect income tax.
When you move states, you’ll need to file two state tax income tax returns for the year in which you moved: One for the state you used to live in, and one for the new state you’ve moved to.
Don’t worry: You aren’t required to pay income tax for the year in two states. Each state will prorate your tax burden, so you’re only paying tax on income you earned while you were in that state.
Here’s how to do it:
Some states, if you reside in them for at least 183 days of the calendar year, consider you a full-time resident. In that case, you’ll need to file a full-time resident return.
Some states have a special income tax return for part-time residents. Others require you to fill out a regular, full-time resident return, even if you’ve only lived in the state for part of the year. And still others want you to fill out a non-resident income tax form. Visit your state tax authority’s website to find out which applies to you.
In some states, if you’re filing as a part-time resident for the year, you don’t report income earned from capital gains, interest, and dividends. Tax on that type of income is paid to the state in which you reside when you earned it. (This is especially relevant if you’re a sole proprietor, and you file personal income along with your professional income.)
Other states require you to report income from interest and dividends, but won’t charge tax on it. Still others do charge tax on it. Which one applies to you depends on which state you’ve moved to.
Most states set their income tax deadlines to be identical with those of the IRS, but a few don’t. Deadlines are subject to change (for instance, as in 2020, due to COVID-19). Check the tax deadlines for both states in which you are filing.
(Heads up: This only applies if you sell products, like online courses or ebooks, which are eligible for sales tax. States do not require you to collect sales tax on therapy services.)
If your new state collects sales tax, and you’re doing business in that state, you fall within its sales tax nexus: You’re required to collect and remit sales tax to the state. To do so, you’ll need a sales tax license. You can apply for one through your new state’s tax authority.
If your former state collects sales tax, and you’ll no longer be doing business there—that is, you’re now outside its sales tax nexus—it’s up to you to surrender or destroy your sales tax license. To do so, you need to deregister your business in that state. In some states, you can just mark “final” on your last tax filing. In others, there’s a more lengthy process of deregistering.
As long as you have a sales tax license in a particular state, you’re required to collect and remit sales tax there.
Certain states collect franchise tax from specific types of companies. Generally, these companies are corporations, partnerships, and limited liability companies (LLCs).
If you’re a sole proprietor, you don’t need to worry about franchise tax in your new state. But if you have an S corporation, you may be required to pay it.
As of 2022, the states that collect franchise tax are:
About a third of all US states, counties, municipalities, and school districts can levy income tax.
These states are:
Even if you’re moving to one of these states, that doesn’t necessarily mean your new county or district is going to collect taxes from you.
For instance, in California, there’s only one district that levies taxes: the City of San Francisco. In Kansas, on the other hand, the number is 484.
The Tax Cuts and Jobs Act (2017) limited state and local tax collection from an individual to $10,000. As a workaround, states have started exploring pass-through entity (PTE) tax.
PTE tax may be charged on the income of a pass-through entity—that is, a business entity whose revenue and losses are passed on to members or owners. That means partnerships, S corporations, and certain LLCs.
Are you a sole proprietor? Good news! You don’t need to worry about PTE tax.
If you’re a single-member S corporation, on the other hand, PTE tax could affect you.
As of March 2022, there are 24 states that collect PTE tax:
In some of these states, PTE tax only applies from the 2022 tax year onwards. Since PTE tax is relatively new, and some states are still deciding whether you implement it, google “[YOUR STATE] pte tax” to get the latest info.
You’ve got enough on your plate dealing with a move to a new state—no need to overcomplicate your finances. By breaking down state tax changes to the five categories covered here, and tackling them now (without procrastinating!) you can set your therapy practice on the path to full state tax compliance right away.
Planning to practice across state lines? Learn how to apply for out-of-state licensure as a therapist.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.