Live in NC, work remotely for a company in VA

[KipDaMan]

I work remotely in NC for a company based in VA.

I had VA taxes withdrawn all year from my pay.

TurboTax 2021 tells me to choose "My employer mistakenly withheld Virginia tax from my income." since I have *no other* income from VA.

"But I feel None of the above." is a better option.

Am I reading it wrong? Is it poorly worded? What is the correct option?

EDIT: I should add, they do not have a reciprocity agreement.

[DanielV01 · Accepted solution]

What TurboTax is suggesting is the correct option.  Since you are not a Virginia resident, Virginia does not tax you for remote work on behalf of a Virginia-based company.  You must be physically working there as an employee to be taxed in Virginia.  So it is correct to say that your employer mistakenly withheld Virginia tax.

You will be taxed in North Carolina on this income.  If your employer did not withhold NC taxes, you will need the Virginia refund to pay your NC tax.  You cannot claim a credit for taxes paid to Virginia on your NC return, because you will receive a full refund of your Virginia taxes withheld.

[KipDaMan]

I know [since my employer DID have VA taxes taken out of my check] I will definitely have to fill out VA non-resident taxes, and then NC resident taxes, and hopefully it won't be too much extra work [or taxes].

Thanks for your response!

[DMarkM1]

It shouldn't be to much work.  TurboTax will automatically transfer most of the entries to your state returns from your federal entries.  You may have few state entries but mostly you'll be clicking through and verifying information.  

[juliangomez]

Hi, I'm in a similar situation to the original poster, except I live in Florida and work remotely for a Virginia-based company. I'm having VA taxes withheld from my pay. I asked the HR department AND called the Virginia tax department directly and both said that I am correctly being charged taxes by Virginia because any Virginia-sourced income is taxable, regardless of whether or not you are physically in the state. So, I'm not sure that this answer is correct on here.

[TomD8]

@juliangomez --

If your work is entirely performed from a Florida location, your income from that work is Florida-sourced, not Virginia-sourced.  Work income is sourced where the work is actually (physically) performed, not where the employer is located.

Per page 9 of the Virginia employers' withholding guidebook, Virginia tax is to be withheld from non-residents only if they work in Virginia. 

https://www.tax.virginia.gov/sites/default/files/vatax-pdf/employer-withholding-instructions.pdf

If you never physically work in Virginia, your employer should not be withholding Virginia taxes.

If they continue to do so, your recourse at year's end is to file a Virginia non-resident tax return on which you report the VA withholding but allocate zero income to Virginia.  This should result in a full refund of any incorrectly withheld Virginia taxes.

[juliangomez]

This is so confusing because I keep getting conflicting answers on this. I called the support number on tax.virginia.gov and explained my situation and they told me that working remotely from Florida for a Virgina-based company constitutes Virginia-sourced income and therefore IS taxable. That also seems to be how "Virginia-sourced income" is defined on their website here: https://www.tax.virginia.gov/what-form-should-i-file-virginia-source-income

Note that the text below doesn't specify that the income must be generated while in Virginia, but just says "from a business operating in Virginia." I can't find any definitive statement claiming that remote work done for a Virginia-based company is NOT taxable. 

Text on the website:
*Taxable income from Virginia sources includes "income from the practice of a trade or business in Virginia" and includes, but is not limited to, wages and salaries earned while in Virginia, income from a business operating in Virginia, rental income from a property in Virginia, etc.

[Hal_Al]

"income from a business operating in Virginia"  means your business, not your employer's business.  If you are a wagw earner/salaried employee that does not apply to you (even if you were self employed, the definition of "operating in Virginia" would apply).

"Taxable income from Virginia sources includes "income from the practice of a trade or business in Virginia" and includes, but is not limited to, wages and salaries earned while in Virginia, income from a business operating in Virginia, rental income from a property in Virginia, etc"

What your employer and the "voice on the phone"  at the Virginia Department of Taxation are telling you is wrong. This is a common question, in this forum, and you'll find that every TurboTax Champ and  Employee Tax Expert is giving the same answer.  That income is not taxable, by the Employer state, unless your employer is located in New York,  Pennsylvania, Nebraska, Delaware or Arkansas.

[TomD8]

@juliangomez --

In support of what @Hal_Al and I are saying, here is the exact wording of Virginia Statute 23VAC10-110-180, which defines "Virginia-source income" of non-residents:

"Net income, gain, loss and deductions from Virginia sources" means that attributable to property within Virginia, or to the conduct of a trade, business, occupation or profession within Virginia. Net income, gain, loss and deductions from Virginia sources includes salary, tips or wages earned in Virginia, gain on the sale of property located in Virginia, income or loss from a partnership, estate, trust, or S corporation doing business in Virginia, and income from intangible personal property employed by an individual in a business, trade, profession, or occupation carried on in Virginia."

https://law.lis.virginia.gov/admincode/title23/agency10/chapter110/section180/

If you never set foot in Virginia, you're not conducting your occupation "within Virginia", nor are you earning your salary "in Virginia."  In this situation your employer should not withhold VA taxes from your pay.