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Level 2

Question

State Taxes - penalty for not making estimated taxes for a summer intern!

Forum|Forum|2 years ago
July 24, 2024
9 replies
86 views

Hi,

I'm writing on behalf of my daughter who was a summer intern out of state last summer (and this summer!). The strange thing was her W2 had withheld ~$9 for IL, in case that's relevant.

First we got a follow-up letter saying she owed taxes for our home state which I'm sorting out ($9). This aligns with the amount the W2 withheld for our home state - coincidence? Not sure yet.

Second and the reason I'm posting, they then issued a penalty for not making estimated payments. She was a summer intern and so didn't even have $$ to make estimated payments. Is this something we can go back and argue and provide justification/evidence of? The penalty is not huge but still not something we think she should have to pay - college student! :).

Thanks a lot!

xmasbaby0

Level 15

You have not mentioned what state you live in. If your daughter is a full-time student that you claim as a dependent, then she needed to file a NON-resident state return for the state in which she worked as an intern, and after preparing that one, she should have prepared a resident return for the state she lives in (or comes home to for school breaks, etc.). You only mention the amount that was withheld, but not how much she actually earned--so it is impossible for us to know if she should have owed tax to either of those states.

Provide some details so we can help more.

**Disclaimer: Every effort has been made to offer the most correct information possible. The poster disclaims any legal responsibility for the accuracy of the information that is contained in this post.**

Opus 17

Level 15

The first general rule is that a person working out of state (their home state) owes a state tax return to the state where they are working, that only reports income earned in that state. Then, they owe a state tax return for their home state that reports and pays tax on all their world-wide income. If that means they pay tax in two states, the home state gives a credit for taxes paid in the other state.

So the first thing you need to sort out is whether she needs to file an out of state (non-resident) return for the state where she worked. Maybe not, if her income was below their threshold or if she was working in a state with no income tax. If she does have to file an out of state return, you would then need to prepare an amended return for your home state to calculate the taxes owed in the home state, and take advantage of the credit for taxes paid to the other state.

Regarding the penalty, it is another general rule that income taxes are pay-as-you-go, either by withholding or by making estimated payments, and you can be assessed a penalty if you don't have withholding, even if you pay in full when you file. If your daughter owed tax in your home state but did not have withholding in the home state, she was technically required to make estimated payments instead. However, there is usually a minimum amount of tax below which estimates are not required. The letter might have been sent by a computer that did not take into account the small tax bill.

So first, figure out the other state non-resident tax return issue. Does she need to file in the other state? If yes, she needs to prepare an amended return for her home state which may show a reduced tax bill or no tax bill. (In other words, if she owed $9 out of state and $10 in-state on the same internship, the home state would give a $9 credit and she would only owe $1 in-state.)

Then, you can write a letter to the office that sent the notice, pointing out that she only owed $9 and it is under the penalty threshold for your state. (You will have to look that up or tell us what the states are.). You can also ask for a waiver if this is her first year paying taxes or her first time owing a penalty. You can also point that that as she was working out of state, she didn;t realize she would owe tax in two states and didn;t have home state withholding and you will fix that next year.

Now for 2024 planning ahead, she may want to make an estimated payment by September 15 for the taxes from the summer job, that will prevent the problem from coming up and if she over-pays the estimate, she will get the difference back as a tax refund. It will depend on what state she is working in, what her home state is, and whether she is having withholding in one state or both.

sjjestewartAuthor

Level 2

Thanks for both responses! Sorry for not providing more details.

Our home state is IL and she worked in CA. She did file returns in both states (via TurboTax :)). So we let TT work its magic. The one complexity we had was her W2 with the IL withholding as I mentioned. I have asked her to reach out to her HR department (she's back at the same company this summer but now on the east coast!) as I'm curious as to why this $9 was withheld for IL. I'm sure there is a reason.

We have no problem paying the $9 if in fact something was done wrong on our end. I was not particularly happy about the unrelated penalty they added for not making estimated tax payments. But good suggestion to do that for 2024 or we may be in the same boat!

Thanks a lot!

Opus 17

Level 15

@sjjestewart wrote:

Thanks for both responses! Sorry for not providing more details.

Our home state is IL and she worked in CA. She did file returns in both states (via TurboTax :)). So we let TT work its magic. The one complexity we had was her W2 with the IL withholding as I mentioned. I have asked her to reach out to her HR department (she's back at the same company this summer but now on the east coast!) as I'm curious as to why this $9 was withheld for IL. I'm sure there is a reason.

We have no problem paying the $9 if in fact something was done wrong on our end. I was not particularly happy about the unrelated penalty they added for not making estimated tax payments. But good suggestion to do that for 2024 or we may be in the same boat!

Thanks a lot!

So it's still not clear what actually happened. Did she have CA and IL withholding, or only one state, and which state? Did she have a CA tax liability (paid tax to CA, total combined withholding and any payments)? Her IL tax liability after the out of state credit was $9? And her IL withholding was $9, so she owed no additional payment to IL?

If I understand correctly, no penalty should be owed and you should appeal the assessment by writing a letter of explanation. But I may still not understand the facts correctly.

sjjestewartAuthor

Level 2

Hi,

I had to track down the information and on her W2 it says:

Box 16:

CA - it has her income earned in CA

IL - says income earned is 0.00

Box 17:

CA - state income tax withheld

IL - $8.66

Is any other information relevant? It does have Box 14 Other VPDI $$.

Maybe we did it incorrectly but I thought we followed TT.

Ultimately she paid into IL on the 1099-IL form based on her income earned (over $1K which likely explains the penalty), and then on the CA 1099-CA non-resident form it calculated CA taxes as well so only refunded some of it (it was the Non-Resident form so perhaps this is as expected - she does owe some portion to CA perhaps). But now I'm questioning whether we did it correctly.

What is the correct flow of taxes and refunds so that we only pay to 1 state (or pay the appropriate amount to each state??)?

Thanks!

Opus 17

Level 15

Illinois should not be penalizing your child unless your child owed more than $1000 when she filed her tax return. See this for more.

https://tax.illinois.gov/research/publications/pubs/illinois-estimated-payments-requirements-for-individuals-and-businesses.html

The letter may have been sent in error.

sjjestewartAuthor

Level 2

Thanks! Since she didn't pay into IL (no withholding), she did owe just over $1K to IL - the withholding was done in CA.

Perhaps that is a justification to avoid the penalty? She is already having taxes withheld for CA rather than IL. She shouldn't have to pay into both, should she?

Or am I missing something else and she should have taxes withheld for IL rather than CA???

Thanks a lot!