How does withholding work when working in another state?

[Anonymous]

Hi,

I live in California, but the company I work for is located in Pennsylvania. I work completely remotely and have not set a foot in PA. In such a case...

• To which state do I pay state taxes? Do I first file a non-resident tax for PA and then get tax credit for it when filing a resident tax for CA?
• For which state do I withhold taxes (for 2022)? Right now, my employer withholds both PA and CA taxes from my paycheck, but I'm wondering if I should ask them to withhold from just one state.

Thank you for your help.

[TomD8 · Accepted solution]

1.  You definitely pay state income tax to CA.  CA can tax its residents on ALL their income, regardless of where it's earned.  So you definitely want your employer to withhold for CA.

2.  With regard to PA, the answer is "it depends."  If you are required by your employer to work remotely from out of state, your income from that work is not taxable by PA.  But if you are working remotely for your own convenience, the income is taxable by PA. 

 https://www.revenue.pa.gov/COVID19/Telework/Pages/default.aspx

3.  If your income is taxable by PA, you'll have to file in both states.  But you would be able to claim a credit on your CA return for the taxes paid to PA.  However, since PA's tax rate is much lower than CA's, it is very unlikely that the credit would offset your entire CA tax obligation.  So in that situation you'd want your employer to withhold for both states.

4.  PA did have a special Covid rule.  If you were working in PA prior to the pandemic, and then switched to remote work due to the pandemic, that remote income would be taxable by PA.  This rule expired June 30, 2021.

[Anonymous]

Your answer is incredibly helpful. Thank you so much! Just a follow-up question:

You mentioned that I'd want my employer to withhold taxes for both PA and CA if my income is indeed taxable by both. But I'm wondering, is it possible (or better) to withhold just the PA tax? Withholding both states would result in a bigger tax return next year, but withholding extra money for CA would mean less opportunity to invest or put in savings for interest. Feels like I'm losing potential money by withholding for two states.

[TomD8]

If you don't withhold CA taxes, you may be faced with fees and penalties, along with the taxes that'll be due to CA, when you file next year's tax returns.  See this:

https://www.ftb.ca.gov/pay/penalties-and-interest/index.html

Remember that because of the difference in tax rates, it's unlikely that your "other state credit" for PA will totally offset your CA taxes due.