Do I need to file a Michigan nonresident tax return if I worked remotely from Michigan for my NY employer?

[nymich]

I am a NY resident and my employer is in NY. In 2020 I worked remotely from a family member’s home in Michigan for several months, due to the Covid pandemic. My permanent address is still in NY and I plan to return there in a couple months. I plan to file in NY as a full time resident, but do I also need to file a nonresident return in MI for the portion of income I earned while working remotely there? I do not have MI on my W-2 or withholdings as my permanent address hasn’t changed. I have been told I don’t need to file in MI as the source of my income wasn’t from MI, but from NY. I’m not sure if this is accurate since I was physically in MI doing the work. If I do have to file in MI will this result in double taxation? I am not sure if NY would grant me a resident credit for the MI taxes as NY might claim all my income is NY sourced, due to the convenience of the employer rule.

[MaryK4]

Yes, unfortunately, Michigan requires you to file as a nonresident and pay state income tax for the work you performed in the state, so you do have to file.  You will be able to get the credit for tax paid to another state on your resident New York tax return.  The credit applies because you are a NY resident who pays nonresident tax to Michigan.  The convenience of the employer rule works to tax nonresident of New York whose employer is based in New York.  

[nymich]

Thank you for the response. 

So even though the work performed in Michigan wasn't for a MI employer I still have to file a nonresident return there?

As for the NY resident credit, the NY state tax website states you are entitled to claim a resident credit if "you were a full-year resident of New York State and you had income sourced to and taxed by another state..." I understand the convenience of the employer rule applies for nonresidents, but is it possible for NY to try to reject my resident credit by arguing that the income taxed by Michigan isn't "sourced to" Michigan since it derived from a NY employer and not a MI employer?

Additionally, if I apply the credit can I end up getting penalized if NY ends up saying I can't claim the credit for whatever reason?

[TomD8]

Michigan Statute 206.110(2)(a) defines Michigan-sourced income (of a non-resident) as:

(2) For a nonresident individual, estate, or trust, all taxable income is allocated to this state to the extent it
is earned, received, or acquired in 1 or more of the following ways:
(a) For the rendition of personal services performed in this state.

http://www.legislature.mi.gov/documents/mcl/pdf/mcl-act-281-of-1967.pdf

Therefore the remote work you performed in Michigan is Michigan-sourced, even though performed for an out-of-state employer.

Therefore your remote earnings are taxable both by MI - because it is sourced there - and by NY - because NY is your domiciliary state and thus able to tax all your income, regardless of source.  And you are eligible to claim the other state credit on your NY return.

In TT, be sure to complete the non-resident state return first, before the home state return, so that the program can calculate and apply the credit correctly.

[nymich]

Thank you for the detailed response.

My last 2 follow up questions are:

1. Do I have to submit any explanation or proof for the taxable income I report to Michigan? How will MI know that it is accurate if I don't have a W-2 from Michigan?

2. Could I get penalized or could my employer get penalized for not doing MI withholdings on my paychecks throughout 2020 or for not having MI taxes on my W-2?