Multistate Tax for Consultants: How Remote Work and Travel Create Nexus

The remote-work explosion created a multistate tax problem for independent consultants. A consultant who lives in Texas (no state income tax) but works for clients in New York, California, and Illinois may owe income tax to those states on the income earned from work performed there, or from clients located there, depending on each state’s rules. The same consultant who occasionally travels to a client’s office in New York for strategy meetings may cross New York’s nonresident filing threshold without realizing it. For consultants operating through an S-Corp or LLC, the entity itself may have nexus in the client’s state, triggering additional filing obligations.

What triggers nexus for a consulting firm?

Physical presence: An employee, owner, or contractor working in the state, even for a few days, can create nexus or a nonresident filing duty, depending on the state. P.L. 86-272 protects only the solicitation of orders for tangible goods, so it doesn’t shield a consultant’s in-state work. Day-count thresholds vary by state, and some states have none: Pennsylvania, for example, taxes nonresidents on compensation for services performed in Pennsylvania.

Economic nexus: Some states assert income tax nexus based on the dollar amount of sales sourced to the state, much like sales tax economic nexus. New York, for example, treats a corporation as deriving receipts there once its New York receipts reach $1.283 million in a year, and California’s 2025 test is California sales over $757,070 or 25% of total sales, whichever is less.

Remote employees: If the consulting firm hires a remote employee who lives and works in another state, the firm will often have nexus in that state through the employee’s presence (California, for example, counts California payroll over $75,707 for 2025 or 25% of total payroll). That can trigger entity-level filings and payroll obligations in the employee’s state.

How is consulting income sourced to a state?

States use different rules to determine how much of a consultant’s income is taxable within their borders:

Market-based sourcing: Income is sourced to the state where the client receives the benefit of the service. If the client is in California and the consultant performs the work from Texas, the income is California-source under market-based sourcing. Many states use it for business apportionment, including California and Illinois.

Cost-of-performance sourcing: Income is sourced to the state where the greatest proportion of the costs of performing the service are incurred. Under the traditional version of this rule, the receipt goes entirely to the state where the greater share of the work is done: if 80% of the work happens in the consultant’s Texas home office, all of it is assigned to Texas, not 80%. Some states have moved away from it for services; Illinois, for one, moved from it to sourcing services where they’re received.

What about the “convenience of the employer” rule?

A few states (New York is the most aggressive) apply a “convenience of the employer” rule: if a nonresident employee works remotely for a New York employer for their own convenience (not because the employer requires it), New York taxes the income as if the employee were physically present in New York. This rule was designed for employees, not independent contractors, but the principle can affect consultants who work for New York-based clients.

For independent consultants (not employees), the convenience rule does not directly apply. And for a nonresident who runs an unincorporated business both in and out of New York, New York allocates business income on Form IT-203-A using property, payroll and where services are performed, not where the client is.

How do credits prevent double taxation?

When a consultant owes income tax to multiple states on the same income, the home state typically provides a credit for taxes paid to other states. This prevents double taxation, but only if the consultant files correctly in all states.

If the consultant lives in a no-income-tax state (Florida, Texas, Wyoming, etc.), there is no home-state credit to claim, and the tax paid to client states is the final cost. The consultant cannot recover the state tax paid to New York or California by crediting it against a non-existent home-state tax.

For consultants living in income-tax states, the credit is limited to the lesser of (a) the tax actually paid to the other state or (b) the home state’s tax on the same income. If the consultant’s home state has a lower rate than the client’s state, the consultant pays the higher rate on the sourced income (the credit covers the home-state tax, but the excess paid to the client state is not refunded).

What filing obligations does the entity have?

An S-Corp or LLC with nexus in another state typically must:

1. Register as a foreign entity with the state if its business-registration rules require it
2. File an entity-level tax return in that state (Form 1120-S equivalent)
3. Pay any minimum taxes or franchise taxes (California’s $800, New York’s fixed-dollar tax)
4. Check whether the state requires withholding or estimated tax on the nonresident owner’s share of income sourced to the state
5. Include the state information on the owner’s K-1

For a consultant with clients in many states, the compliance burden can be significant. Filing duties don’t turn on a materiality threshold, so check each state’s own filing rules before deciding where to file. States with no broad personal income tax (Texas, Florida, Wyoming, Nevada, Tennessee, South Dakota, Washington, New Hampshire, Alaska) don’t need a personal income tax return, but some still tax the business: Texas franchise tax, Tennessee franchise and excise tax, and Washington’s business and occupation (B&O) tax on gross receipts.

Related guides:

• Consulting Employee Vs Contractor Classification
• Consulting Entity Structure Llc Scorp Sstb
• Consulting Firm Tax Deductions Expenses
• Consulting Home Office Deduction Remote
• Consulting Insurance Deductions Eo Liability

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.