We were on a call with a prospective client recently, a telehealth therapist, licensed in several states, clearly on top of her practice. We were going through the usual discovery call questions and asked about her client locations. She listed a handful of states without hesitation.
Then we asked if she’d been filing in any of those states.
Pause.
“I have my license there. Does that count?”
It doesn’t. Since telehealth took off, this has become one of the most common conversations we have with new clients. Therapists are licensed in multiple states, seeing clients across state lines every week, and most have not connected the dots between where their clients are and what they owe. Licensing and tax compliance are two different clocks, and they don’t always tick together.
The short version: if you’re generating income sourced to another state, because your client lives there, not just visits there, you may have a filing obligation in that state. Some states have no income tax, so it’s a non-issue. Others do, and they’re paying closer attention than they used to.
Here’s what’s actually going on with multi-state tax for therapists, and what we look for when we’re working with telehealth practices.
Does Seeing Telehealth Clients In Other States Create A Tax Obligation?
It can, and whether it does depends entirely on which state your client is in.
Most states require businesses to register and pay taxes when they have “nexus” there. Nexus just means you have enough of an economic or physical connection to trigger tax liability. For therapists, the telehealth question is still unsettled in a lot of states, but several have adopted economic nexus standards that can be triggered by revenue alone. No office, no physical presence required.
Some states treat the client’s location as where the service was delivered. If you’re in Texas and your client is in New York, New York might consider that New York-source income. Other states focus on where you were physically located when you provided the service. There’s no single national standard.
The practical question isn’t whether you had one session with someone traveling through California. It’s whether you have consistent, ongoing client relationships in a given state, and whether the income sourced there crosses a threshold worth attention.
Which States Are Highest Risk For Therapists With Telehealth Clients?
A handful of states are aggressive about asserting tax jurisdiction over out-of-state service providers, and therapists are not exempt from that.
New York, California, and Massachusetts are consistently in this category. California is the clearest example of how low the bar can sit. Under the Franchise Tax Board’s doing-business standard, a business is doing business in California if it engages in any transaction for the purpose of financial gain within California, or if its California sales, property, or payroll exceed annually indexed thresholds. Those thresholds are high enough that most solo practices won’t hit them. The first prong is the one that matters for therapists, because it has no dollar floor at all.
New York applies a similar reach and is known for residency audits that dig into where income was actually earned. These aren’t states that wait for you to figure it out on your own.
For most therapists, the practical risk threshold is whether you have consistent, ongoing client relationships in a given state. A practice seeing five to ten regular clients in California is in very different territory than one that had a single session with a California-based client who was just passing through.
How 1099-NEC Associates In Other States Affect Your Practice’s Tax Picture
If your group practice has contractors or associates who live and work in other states, the exposure is more direct and easier for states to trace.
When you issue a 1099-NEC to an associate in another state, that state typically has a record of your payment. Some states require the payer to register with their revenue agency and withhold state income tax for contractors, even when the payer is based somewhere else.
Beyond withholding, an associate working from another state can itself create nexus for your business there. If your LLC is based in Texas and an associate sees clients from a home office in Colorado, Colorado may view your practice as doing business in Colorado. That’s a registration obligation, not just a filing one.
A group practice in Florida with associates in Georgia, North Carolina, and Florida has potential nexus in three states, not one. Each may require foreign entity registration, income tax withholding, and separate state filings. It adds up fast.
Registered Agent And Business Registration Requirements Across States
Separate from income tax, many states require out-of-state businesses to register as a “foreign entity” before they can legally conduct business there. It’s a registration that says you’re operating there, and most states charge a modest annual fee for it.
“Conducting business” typically includes having employees or contractors operating in the state, maintaining an office or regular work location there, or deriving consistent revenue from clients in that state.
The risk of skipping it isn’t just the fee. Most states bar unregistered foreign entities from enforcing contracts in state courts, so if you ever need to pursue a collections matter against a client or contractor in that state, you may not be able to. For most therapy practices, the practical exposure is small, but it’s worth knowing the rule exists if you’re bringing on remote associates.
How To Handle State Income Tax When You Live In One State And Work In Another
This comes up most often for therapists who live near a state border, see clients in a neighboring state, or moved during the year. It’s also common for telehealth therapists holding licenses in multiple states and generating income from several at once.
Most states protect residents from double taxation through a credit system. You pay tax in the state where the income is earned and claim a credit on your home state return for taxes paid elsewhere. The mechanics vary enough that running both returns through someone who knows both states is usually worth the cost.
Some states also have formal reciprocity agreements. Virginia and Maryland, Virginia and D.C., and several Midwest state pairs let residents file only in their home state. It’s worth checking whether one exists between your state and any state where you’re seeing clients.
Best Practices For Managing Multi-State Tax Exposure
The first step is a state-by-state review of where your revenue is coming from and where your associates are located. Simple in concept, surprisingly revealing in practice.
For a solo practice, this means looking at client locations over the past 12 to 24 months and flagging any states where you have regular, ongoing clients. For group practices, it means mapping every contractor’s work location and looking at where client revenue originates by state.
Here’s where we want to be direct with you: most EHR and billing platforms that therapists use don’t generate a clean revenue-by-state breakdown. That’s a problem that’s going to catch up with a lot of practices eventually. If your platform doesn’t break out revenue by client state, the workaround is to run your own report sorted by client location and build the breakdown yourself. It’s not automatic, but the data is usually there if you look for it. We’ve helped clients do exactly this, and it’s always eye-opening.
The second step is a nexus analysis for each flagged state, reviewing that state’s income tax nexus rules, economic nexus thresholds, and foreign entity registration requirements. This is where things get state-specific enough that a generalist accountant often misses critical details. Working with therapy practice accountants who understand how multi-state compliance works for private practices is the efficient path. We handle this kind of state-by-state income mapping as part of the bookkeeping for therapists work we do at Traktion, and it’s one of the first things we check when we onboard a new telehealth practice.
The third step, if you have unaddressed obligations, is voluntary disclosure. Most states have voluntary disclosure programs that let businesses come forward proactively, typically with reduced or waived penalties for prior periods. Acting before a state reaches out to you is almost always the better move, because once a state contacts you first, the voluntary disclosure window generally closes.
Document Everything From The Start
Keep records of where your clients are located, where your associates work, and where your revenue originates by state. That documentation is the foundation for any nexus analysis or voluntary disclosure, and it’s far easier to build as you go than to reconstruct years later. If you’re using private practice accounting software that tracks client and revenue data by state, you’re already ahead of most.
Review Your Exposure Annually
Multi-state obligations change as your practice grows. A practice with no exposure last year may have it this year if you added telehealth clients in new states or brought on a remote associate. An annual review catches new obligations before they become back-tax situations.
Consider Entity Structure If You’re Expanding
If you’re planning to expand, whether through physical locations or a growing remote workforce, your entity structure matters. What made sense as a solo practice may not fit as you scale. For practices considering S-corporation status, multi-state obligations add another layer, and our S-corporation tax calculator is a starting point rather than the whole analysis.
Multi-State Tax Doesn’t Get Simpler By Ignoring It
Telehealth changed where therapists work and where their clients are. State tax systems are still catching up, but they’re catching up fast, and the exposure compounds the longer it goes unaddressed. A practice with two years of unaddressed California nexus has twice the back-tax exposure of one with one year.
If you’re not sure where your practice stands, that’s exactly the right place to start. The bookkeeping work we do at Traktion includes state-by-state income mapping as part of understanding your full financial picture. If it looks like registration or back-filing is needed, we’ll work through it with you.
Reach out, and we’ll walk through where your practice stands and what needs to happen next.
About the Authors
Mebea Yohannes is the CEO and co-founder of Traktion, an accounting firm built specifically for therapists and mental health practitioners in private practice. Yeshi Negga, CPA is the co-founder and COO. Together, they help solo and group therapy practice owners across the United States with monthly bookkeeping, year-round tax planning, S-Corp analysis, and owner compensation strategy.