My employer withheld taxes for the wrong county. If I select the county I lived in (not the one my employer withheld) my state tax shows the full amount. If I select the county my employer withheld tax for, the amount they withheld is subtracted from the state tax due amount. My employer said I could just pay the difference, but I don't see how to do that with Turbo Tax.
It's reconciled on the Indiana return. Indiana calculates both the state as well as local taxes on the Indiana state return. When figuring out your local tax, you are asked to provide both the county you lived in as well as the county you worked in on the interview. Your Indiana local tax will be the higher of the two county rates. (I am aware that Indiana counties do have different tax rates and I actually anticipated you are living in Indiana, because it's the only state I know of that calculates local tax like this).
Then, both the state and local tax liability will be added together, and your state and local tax withheld will be added together. If what you paid in combined for both is equal to or greter than the combined liability, you still would see a refund; if it is less, then what you owe is covering the difference your boss referred to.
Make sure that they are aware of where you live, however, so they can withhold the correct amount of county tax for you. They are actually required to do so.
Thank you for the response. I decided to test how TT calculates county tax using Marion and Brown. Brown has ~0.8% higher income tax than Marion. When I selected Brown as my resident county and Marion as my employment county, the amount of state tax liability went up. When I selected Marion as my resident county and Brown as my employment county, the amount of state tax liability went down.
I have tested several more permutations of resident county and employment county. It appears that only the resident county matters to TT state tax liability calculation.