Do you owe taxes to a state you never stepped foot in?

[cwb124]

Hello, I currently live in Pennsylvania.  My work office of record is in Wilmington, DE.  My employer does that because there are no offices in Pennsylvania so they put me at the closest one.  DE state income tax is about double that of PA.  I will be paying about $12,000 to DE when I would pay about $6,000 to PA if I was listed as working here.

However, in 2020 I have not yet stepped foot in the state of DE.  And I won't for the rest of this year.  Is there any way to avoid paying state income tax to a state I will not work in during this year?  If I can figure this out it will save me about $6,000.  Doesn't seem right to pay taxes to a state I never actually worked in.    

[TomD8]

[Edited]  If you never live in or physically work in DE, then your income is not subject to DE taxation.  But if your employer incorrectly withholds DE taxes, you'll have to file a non-resident DE tax return (on which you show zero DE income) at year's end in order to get them refunded.  You should have your employer withhold PA taxes, not DE.  

There is an exception to the above: if you're working as a telecommuter from PA for your own convenience, and not because it's required by your employer, then your income is taxable by DE.

This is known as the "convenience of the employer" rule.

Your income is entirely taxable by your resident state of PA, regardless of where it's earned.

If your employer is unable or unwilling to withhold PA taxes, you should make estimated tax payments to PA.

https://www.revenue.pa.gov/FormsandPublications/FormsforIndividuals/PIT/Pages/Personal-Income%20Tax%...

[cwb124]

Thank you very much for the reply!

How can I show zero DE state income when my W2 shows my salary and taxes already withheld for the state of DE?  It shows my office of record as DE.  I did file a non-resident DE return last year and also got credit to state of PA for the taxes I paid to DE.  

Also, is there any documentation or ruling around how many times I go to the DE office, for meetings and such?  I started at this job in Sept 2019, and I went to DE maybe 7-8 times for training and such but then worked from home.  

Lastly, can I claim myself exempt from DE state taxes on my tax withholding info?

[TomD8]

Technically when you attend a business meeting inside DE, you are working "in" DE, and the portion of your income that applies to that time is taxable by DE.  It's up to you or your employer to keep track of that.  For example, if you work a total of 200 days and 10 of them are in DE, 1/20th of your income is taxable by DE.  In that situation, you'll get a credit on your PA return for the taxes paid to DE, so you won't be double-taxed.

When you file a non-resident state tax return showing zero income for that state, it's best to file that return on paper with an attached letter of explanation.  That's because you're correct, there will be a discrepancy between your return and your W-2, so the return is likely to be rejected if you e-file.  Judging by the number of similar questions on this forum, your situation is not all that uncommon (not just with DE-PA, but with many other pairs of states).

If you're never going to work in or live in DE during the entire tax year, and you have no other DE-source income such as rental income from a property located in DE, then you are in effect exempt from DE income tax.

[cwb124]

Thank you very much for the help.  Really appreciate it.  I wasn't sure if some states had really tight rules around how they determine if you owe them state taxes so if my question was specific to the state of DE or whatnot.  

[Hal_Al]

Delaware is one of those states* that tax telecommuters, under the convenience of the employee rule (see https://www.journalofaccountancy.com/issues/2009/jun/20091371.html).  

So, your employer may be correct** to withhold DE tax and you are required to file a DE non resident return. PA will give you a credit or partial credit for what you pay DE. 

This may change, by tax filing time, as some states are reviewing their rules/laws because of the pandemic.

*New York,  Pennsylvania, Nebraska, Delaware and New Jersey

**It depends on your work situation. If you are a regular telecommuter, you are subject to DE tax.  But, for example, you are in PA for access to clients, you may meet the convenience of the employer test, and not be subject to DE tax.

[TomD8]

@Hal_Al is absolutely correct.  I should have pointed that out in my original answer, which I have edited to include that information.

[Anonymous]

other situations where you could owe taxes to a state you were never physically present.    income from a trust, s-corp or partnership with nexus in a different state.   some partnerships have nexus (physical presence under state law)  this can subject it and even out of state trust beneficiaries, shareholders and partners to tax in those states.