A unique tax situation - Please help!

[drmarkf]

Hello, My wife is a W-2 consultant. Her consulting company is located in Illinois. The client she works for is in the New York state. We live in California. During 2023, she worked remotely from home and never even traveled to New York. Her consulting company has designated her work place as New York and as such a good chunk of taxes were withheld and ultimately paid to the state. Meanwhile, we were also taxed substantially in California.

Does this sound right? Should she just pay taxes on the her state of residence? Isn't this double-taxing? Any guidance is appreciated. We used TurboTax Premier for 2023 taxes.

Thanks, Mark

[Hal_Al]

 Q. Isn't this double-taxing? 

A. No, because you claim a credit, on your California state tax return, for the tax paid to NY.

Q. Does this (paying NY tax) sound right?

A. No, but maybe yes. NY (and a handful of other states) taxes telecommuters. It's usually based on the employer being located in NY. This the first time I've heard of it based on the employer's client being located in NY.  But that question may be academic. The NY tax does not apply, if she never physically worked in NY, during the year.  Discuss it with your employer. I believe they are mistaken by withholding NY tax. If they have documentation for their position, please share it with this forum. 

Q. Should she just pay taxes on the her state of residence?

A. Yes. 

[NCperson]

@Hal_Al - there are plenty of comments and question on these boards about the NY situation.  From what I understand if your NY employer permits you to work out of state for your personal convenience, the income is taxable to NY, even though you may have not ever been in NY.  And that is why payroll departments withhold NY income tax. The tax does apply. 

That would be a different situation than a NY based company that hired someone in another state for the sole purpose of working from that other state.  Or a NY based employee who the firm transferred to another state.  In these instances, the employee is NOT working from the other state for personal convenience. 

one such article on this topic and the challenges: 

https://news.bloombergtax.com/tax-insights-and-commentary/new-yorks-convenience-of-employer-test-sta...

it is unusual.   

[TomD8]

A non-resident of New York who never physically works within New York, not even for a single day, has no income tax obligation to the State of New York.  From the Appellate Division of the New York Supreme Court:

“ A nonresident who works in another State but who performs no work in New York is not subject to New York State tax liability no matter for whose convenience or necessity he performs the work.” Hayes v. State Tax Comm, 61 A.D.2d 62, 64 (N.Y. App. Div. 1978) 

Your wife's income is 100% taxable by her resident state of California.  Ideally her employer will withhold only CA taxes from her pay.

Your wife should file New York form IT-2104.1 with her employer in order to have them cease withholding NY taxes.  Here's a link to that form:

https://www.tax.ny.gov/pdf/current_forms/it/it2104_1_fill_in.pdf

New York's "convenience of the employer" rule applies only to those who perform services both within and without New York State during the tax year.  See the first paragraph of the relevant New York tax document:

https://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf

If her employer cannot withhold California taxes for her, then she must make quarterly estimated tax payments to CA.

https://www.ftb.ca.gov/pay/estimated-tax-payments.html