Thousands of people live in Fort Mill, Rock Hill, Indian Land, or Lake Wylie and drive to Uptown or South End every morning. Their paycheck says North Carolina. Their mailing address says South Carolina. Their tax return has to say both, and the order in which the two states claim the income is what keeps it from being taxed twice.

Who taxes what

Your home state taxes everything you earn, wherever you earn it. Your work state taxes the wages earned inside its borders. For a South Carolina resident working in Charlotte, that means South Carolina taxes all of your income and North Carolina also taxes the wages earned here. The overlap is resolved on the home-state return: South Carolina gives a credit for the tax you paid North Carolina on the same income. For a North Carolina resident working in South Carolina, the roles reverse.

Why withholding does not settle it

Employers generally withhold for the state where the work is done, which is why a South Carolina resident often sees North Carolina tax come out of every check. Whether that is the right amount for the year depends on the two states’ rates and rules, and the credit is limited so that you never get back more than the home state would have charged on that income. If the home state’s tax is higher than what was withheld, the difference is due when you file. Many people find this out in April, from a balance due that nobody warned them about.

What to check each year

  • That the nonresident return in the work state reports only the wages earned there, not your whole income
  • That the credit on the home-state return matches the tax actually paid to the other state, not the amount withheld
  • Whether any of your work was done at home, in your home state, on days you did not commute: wages are generally sourced to where the work is physically performed, and the details differ by state
  • Whether an estimated payment to your home state would avoid a balance due
  • How a bonus, stock vest, or other lump of income is sourced, since it can be treated differently from salary
  • Whether you moved across the line during the year, which turns this into part-year returns in both states

The short version

It is a two-state return, and it is routine when it is prepared with the credit in mind. It goes wrong when each return is done as if the other did not exist. If you are not sure whether yours was done properly in a past year, I can look at the last two returns and tell you. More on the practice is on the Charlotte CPA page.