Employer mistakenly withheld NY taxes instead of NJ

[Ella G]

I am a NJ resident.

My company is based in NJ , some client offices are in NYC.

This March we were supposed to move to NYC client offices but due to the ongoing pandemic it never happened.

I am working from home since mid-March 2020.

In November I've noticed that my employer withholds NY taxes from my paycheck since March.

Apparently , they received an update about our move to NYC and updated payroll accordingly.

No one contacted me to verify the move.

When I raised the issue with my company, they said that payroll stubs cannot be corrected retroactively.

They then said that I will get my money back when I file taxes.

They refused to provide an official letter explaining the situation.

Several questions:

 1.  Should I insist on an official letter for IRS? I never lived or worked in NY , yet taxes were paid to NY. 

 2.  Will I be able to file NY non resident tax return while claiming $0 income in NY state ?

 3. I read about similar cases and general advice is to file NY non-resident first, then NJ resident. Is this correct in my case?

Any other things I need to do/be aware of  to get my money back ( NY taxes are higher than NJ)

Thanks in advance

[rjs · Accepted solution]

The IRS doesn't care which state taxes were withheld for. The IRS only handles your federal tax return. For state taxes you have to deal with the New York State Department of Taxation and Finance and the New Jersey Division of Taxation.

There is no need to correct your past pay stubs. But your employer can and should make the correction before they issue your W-2, so that the W-2 will be correct. They will issue the W-2 in January. If your description of what happened is accurate, it was the employer's mistake and they should correct it. If your W-2 correctly shows all your income as New Jersey income with New Jersey tax withheld, and it does not show any New York income or New York withholding, you will not have a problem. You will file only a New Jersey resident tax return.

If your employer refuses to make the correction, you can file a New York nonresident tax return and allocate zero income to New York. But since your W-2 will show New York income, you will probably get a letter from the NY Department of Taxation questioning why your tax return shows no New York income. You will have to explain to them that you never lived or worked in New York, and that your employer erroneously withheld New York tax and showed New York income on your W-2. If you can get a letter from your employer confirming the error, it would certainly help.

(By the way, New York has an unusual rule that the state wages in box 16 of the W-2 must be equal to the federal wages in box 1. Any adjustment to the amount of New York income is supposed to be made on the New York tax return. So don't be upset when you see your entire year's wages in box 16 on the NY line.)

If you do have to file a New York tax return, you should prepare the New York nonresident return first, then the New Jersey resident return. However, in your specific, unusual case, it doesn't really matter. The reason for doing them in that order is so that the New Jersey return will correctly calculate the credit for tax paid to New York. But you will have no tax paid to New York, since you will get back all the New York tax that was withheld, so you will not get the credit on your New Jersey tax return.

Whatever happens, make sure that your employer stops withholding New York tax until you actually move to a New York location.

[Ella G]

Thank you for a prompt and elaborate answer.

I did request a correction to state withheld taxes and it was implemented.

Most likely employer will NOT correct the W-2 and will NOT provide the explanation letter -  currently they claim that no letter is necessary.

Could you answer the follow-up question:

What is the likely outcome on taxes owed/ refund  in this scenario?

Am I correct in assuming the following:

• there will be no reciprocity between NY and NJ
• I will not be able to file NY tax return electronically
• I will have to pay to NJ 8 months of taxes and probably get a fine
• I should receive a full refund from NY but it may take a long time
• Employer is not obligated to correct W-2 or clarify anything to NY Tax authorities and there is nothing I can do.
• Turbotax will be able to help me through this convoluted filing

I'd appreciate any additional advice you may give on this matter.

[rjs]

---

@Ella G wrote:

Am I correct in assuming the following:

• there will be no reciprocity between NY and NJ

---

Correct.

---

• I will not be able to file NY tax return electronically

---

I don't see why you wouldn't be able to file the NY tax return electronically.

---

• I will have to pay to NJ 8 months of taxes and probably get a fine

---

Probably true. (It's a penalty, not a fine.) You may also have to pay interest on the late-paid NJ tax.

---

• I should receive a full refund from NY but it may take a long time

---

I think so.

---

• Employer is not obligated to correct W-2 or clarify anything to NY Tax authorities and there is nothing I can do.

---

I don't know about that. Ask a tax lawyer. The main factor working against you is that you didn't alert your employer to the error promptly. You let it go on for 8 months or so before you told them. You probably do have some obligation to check your pay stub every pay period and promptly notify the employer of any error. Any time there's a change in your net pay, that should be a signal to you to check the calculations.

---

• Turbotax will be able to help me through this convoluted filing

---

It's not so convoluted. It's the same two-state filing situation you will have every year when you are working in New York and living in New Jersey. The only difference is how much of your income is New York income. TurboTax will help you with it.

[ggiaquinn]

This situation happened to me - my employer incorrectly withheld NY state and local taxes when I neither lived nor worked in the state - and did not correct the W2. However, TurboTax is not allowing me to eFile the return after I allocate $0 of my federal income to NY as Box 17 state withholding cannot be equal to or greater than my wages in Box 1.

[DanielV01]

@ggiaquinn  There's two possibilities.  The first is that you are correct that New York should not tax you.  If this is the case, and your Allocation to New York is $0, preventing you from e-filing, you will need to mail-in your New York return.  Be prepared in this case to provide proof that New York should not have withheld tax on you.

The second possibility is that you actually do pay tax to New York.  This will be the case if you telecommute.  If your employer is a NY-employer and you are telecommuting from home, New York does tax you even though you don't step foot inside the state.   This is called the convenience of the employer principle.  

Feel free to clarify your situation.

[Zinian]

did you end up mail in Form IT203, allocate 0 amount on non resident NY state income on line 19?

[Franid]

Hello!

I know this was from a while ago but I’m in a similar situation. I’m just a little bit confused on one thing!

If my employer was to correct the W2 to state that I did in fact earn $0 from NY and only earned money in NJ, how do I go about getting the refund from NY for the money that was mistakenly paid to them from my pay stubs during the year? My employer took out about $1300 from my pay stubs before I noticed and so NY owes me that money back.

[rjs]

@Franid 

You didn't give any details of your "similar situation." We can't assume that the details of your situation are the same as either of the other two users who posted in this thread. To avoid confusion, I strongly suggest that you start over by posting a separate new question of your own, and give all the details of your particular situation (keeping in mind that people who see your new question will not have seen this thread). Do not add on any more to this old thread from a year and a half ago.

In your new separate question, give all of the following information.

• Clearly state the problem and your question about how to resolve it.
• What year are you asking about?
• What state did you live in during that year? Did you live in the same state for the entire year?
• What state did you work in during that year? Did you work in the same state for the entire year?
• (If you moved, or your job location changed, give the details.)
• If you worked in New Jersey, did you work at a company location in New Jersey, or did you work at home? If you worked at home, and your employer was located in New York, i.e. you telecommuted, that could create complications. If that is the situation, why were you working at home?
• If you did not live or work in New York at all, why did your employer withhold New York tax?
• What is in boxes 15 through 20 of your W-2? If there is more than one line of state information in those boxes, what is on each line?
• Have you asked your employer to give you a corrected W-2? If so, what was their response? Do you expect them to correct it?
• Have you filed any state tax returns for the year in question?
• Provide any other information that you think might be relevant.

Again, do not reply here. Post a new separate question of your own, and include all the details so that someone can help you.