I work remotely from NY for a hospital in MD. The hospital withholds MD taxes on my NY source income. Is this considered "withheld in error"?

[Johnni3]

I did speak to HR about this, but they say they can't withold NY taxes, because they aren't filed as a NY business and it's not cost effective to do so for 1 employee.

[JotikaT2]

No.  As New York does impose income taxes on any New York sourced income, you will need to file a nonresident New York state return.

New York filing requirements for nonresidents or part-year residents

When you prepare your Maryland resident state tax return, you will be able to claim a credit on your return for the income that is taxed in both New York and Maryland.  This ensures your income is not taxed twice.

To ensure your return is calculated correctly, you will need to confirm a few items: 

In the My Info section of TurboTax, confirm that you have entered the correct state information: 

1. Click Edit to the right of your name 
2. Confirm your input under #2 Tell us the state(s) you lived in
3. Go back to the personal information section, and verify the mailing address and "Other state income" section.  Be sure to answer yes to the question asking "Did you make money in any other states?". 
4. Review your input in the Federal section under Wages.  Make sure to report your state wages and withholdings as reported on your W-2 forms.

Please note the following as it will affect the calculations: 

When you are preparing more than one state return, make sure you prepare the nonresident year resident New York state tax returns first.   Be sure to answer the questions correctly to ensure only income sourced to that state specifically are reported.  If there is no income that is sourced to New York state, please indicate the source of the income.

You will then prepare your resident state Maryland return.  As you go through the interview, you will be prompted to enter information regarding taxes paid in another state.  This will generate the credit on your Maryland return for the taxes already due to New York.

[TomD8]

If you're a resident of New York, submit MD form MW507 to your MD employer to stop the MD withholding.  Here's a link to that form:

https://www.marylandtaxes.gov/forms/current_forms/mw507.pdf

Check box 3b on the form.

Also, since your income (as an NY resident) will be 100% taxable by NY, and since NY taxes are not being withheld from your pay, you should make quarterly estimated tax payments to the State of NY.  This web reference gives the details on that:

https://www.tax.ny.gov/pit/estimated_tax/default.htm

My answer assumes that New York is your state of residence.

[Johnni3]

I am a resident of NY.

The problem is that if I call NY, NY says it's NY source income.   If I call MD, MD says it's MD source income.   Currently MD has declined to refund me for last years witholdings, while NY has also charged me taxes on the same income.   

I'll have to try the form, because both states appear to want to double tax the same income.   

[TomD8]

Since you are a NY resident, all your income is taxable by NY, regardless of its source. 

MD can tax non-residents only on MD-sourced income.  Maryland's rule is that income is "Maryland-sourced" if it is "compensation for services performed in Maryland."  See this:

https://www.marylandtaxes.gov/covid/documents/TaxAlert050420-EmployerWithholdingonTeleworkers.pdf

Therefore, if you are a non-resident of MD who never physically worked in MD, your work income is not MD-sourced - and therefore not taxable by MD.   

If this is your situation, and if MD will not refund the erroneous withholding, my suggestion would be that you protest in writing, rather than via a phone call.

If your protest fails and if you do wind up having to pay MD income tax, you can claim a credit on your NY return for the taxes you pay to MD on the income taxed by both states.  Thus you will not be double-taxed. 

[Hal_Al]

Q. Is this considered "withheld in error"?

A. Yes.  You should be able to file a non resident MD tax return and get a full refund.  The statement "Currently MD has declined to refund me for last years witholdings" is VERY surprising.  Did you actually file a MD return or did you try to get the refund by some other method? 

If there's something new going on here and you do have to pay MD income tax, you claim a credit, or partial credit,  for that  on your NY return.  There is usually little or no actual double taxation. 

______________________________________________________________________________________________

The general rule is: your report all your income on your home state return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. Your home state will give you a credit, or partial credit, for what you paid the non-resident state. You will have to file a non resident MD state return and pay MD tax on the income earned there.. You will also file a NY full year resident return and calculate tax on ALL your income. NY will give you a credit, or partial credit, for the tax you pay MD. So, there will be little or no double taxation, but you have the cost and hassle of filing two state returns. Do the nonresident state return first.

[Johnni3]

Yes I filed as a non-resident, looking to get a full refund of about 4,000.   MD instead sent me to their review department, has assumed I'm an MD resident, billed me for an additional 1500 (having laid claim not only to the income NY based income for the MD company, but also to other income, such as my wifes office work here in NY.      

[Johnni3]

Quick question regarding "Therefore, if you are a non-resident of MD who never physically worked in MD, your work income is not MD-sourced - and therefore not taxable by MD."

Where I'm having touble is with the bit on the attachment you sent that also says "Compensation paid to a Maryland nonresidentwho is teleworking in Maryland is Maryland-sourced income, and therefore, subject to
withholding."

I do my work remotely in NY, so perhaps that does mean MD considers this Maryland Sourced income?  The problem is that NY is also considering this NY sourced income.   

[TomD8 · Accepted solution]

If you’re teleworking from a New York location, then you’re not teleworking “in Maryland.”