Get to Know Your State Withholding Taxes

April 2, 2021

Latrace White, Owner & Principal Manager of Diane White Consulting, LLC.

A friend of mine contacted me about his withholding taxes on his paycheck. He lives in Connecticut but works in New York City. In the tri-state area, many people from New York, New Jersey, and Connecticut live in one state and commute to work in the other. I, too, have been one of those commuter workers. I lived in New York City but worked in New Jersey for six years. Although compensation may be excellent, this arrangement can present many challenges when preparing one's tax return. I am not a tax professional, but I have worked within the payroll and accounting realm for many years, so I am familiar with withholding and tax reporting challenges. My friend reviewed his paystub and realized that his employer did not withhold Connecticut state taxes from his paycheck; he then went to his payroll department and asked them to withhold Connecticut state taxes from his pay, and their response was:

"The Payroll Tax Team has advised that while all wages of a Connecticut resident are subject to Connecticut income tax, regardless of where they are earned, employers are required to withhold from the resident's wages only to the extent that it exceeds the amount required to be withheld by the other state for services performed there. Employers must withhold New York income tax from nonresidents' wages for services performed within New York; otherwise, it would be considered courtesy taxation. ABCDEF, Inc. does not offer this option."

My friend emailed and said Tracey, "What the heck are they talking about?"

Ultimately, this means that the agreement between New York and Connecticut says that whichever state's withholding tax is higher-- is the state the employer is going to withhold tax for. In this case, that is New York State. Because of this agreement, they (ABCDEF, Inc.) are not obligated to withhold Connecticut tax; if they do, it would be a courtesy they are not offering.

Many state agreements exist regarding withholding taxes, which can be complicated to understand. If you work in one state and live in another, it is essential to understand these relationship rules directly impacting your tax return. The topic of state withholding taxes has become ever more apparent due to remote working because of the pandemic because employees have been working from locations other than the office. Another concern of my friend was that since he spent the majority of 2020 working from home, why should he still pay taxes in New York? Many people have bought up this exact point throughout the country. New York State says:

"It would not provide any COVID-19-related exceptions to its' historical "convenience of the employer" rule. Under this rule, the wages of any nonresident employee whose primary office is in New York State are still sourced to New York for withholding and individual income tax purposes unless the employer has established a "bona fide employer" office at the employee's telecommuting office." https://www.tax.ny.gov/pit/file/nonresident-faqs.htm#telecommuting

This means that if your employer has not established an office for you to work from in the state you live in--then the employer does not have to withhold taxes from your home state even though you are working from home due to the pandemic.

Many organizations do not have the infrastructure or expertise to support remote work arrangements. They are attempting to develop remote work policies to limit the places that employees can work from to ensure that the organization remains compliant. Simultaneously states are aggressively seeking tax losses because of the pandemic. To ensure that you are not liable for additional withholding taxes and require more information regarding remote work withholding, you can visit the state website for which you work and plan to work remotely.

#StateTaxes #LatraceWhite