Employer withholds only living state tax and wrongly record working state

[Nimood2021]

I work in NY and live in NJ.  My employer recorded my resident and working state both in NJ.  Consequently, only NJ taxes were withheld.  W-2 form shows only NJ. How should I file state tax returns?  Thanks.

[Hal_Al · Accepted solution]

You still need to file a NY non-resident return and pay NY income  tax on your NY earnings.  You report ALL your income on your NJ Resident tax return. But, NJ will give you a credit, or partial credit, for the tax you pay to NY.  So, you will be getting a refund from NJ for the over withholding. 

[Nimood2021]

Will there be any penalty from NY?

[Hal_Al]

Yes, if you owe more than $300.

The penalty you will have to pay will equal the federal short-term interest rate plus five and one half percentage points (adjusted quarterly), but not less than 7.5%.

[Nimood2021]

Since it is the employer’s fault, will or should my employer take care of the penalty charge instead?  Or NY IRS can excuse it since it is the first time?  Thanks.

[Hal_Al]

No. You're responsible for your own taxes, not your employer.  

I'm not from NY or familiar with their policy on first time underpayments.  But their web site further says:

The underpayment penalty applies if your 2020 withholding and estimated tax payments are not at least the smaller of:

• 90% of the tax shown on your 2020 return,
• 100% of the tax shown on your 2019 return (110% of that amount if you are not a farmer or a fisherman and the New York adjusted gross income (NYAGI) (or net earnings from self-employment allocated to the MCTD) shown on that return is more than $150,000 ($75,000 if married filing separately for 2020)). You must have filed a return for 2019 and it must have been for a full 12-month year.

Reference: https://www.tax.ny.gov/pit/file/interest_and_penalties.htm#underpaying_your_estimated_tax

Whether they let first time filers off the hook, I don't know.  Probably not.  You could call them or just wait to see if they bill you.

[Nimood2021]

2020 is a special year.  2/3 of year, I worked from NJ home.  Can I claim 2/3 of income from NJ, and 1/3 income from NY?  

Or, 

My 2020 payslips only show me on the payroll in NJ.  I assume my employer reported me as a NJ employee to the state of NJ.  My name may not show on the payroll list in NY state which was provide by my employer.  Should I just file NJ tax return only to go along with W-2 information, 100% NJ?

My employer has multiple sites in several states.  Address on payslips is in PA.

[Hal_Al]

If it was any other state than NY, you would  claim 2/3 of income from NJ, and 1/3 income from NY.

But New York (and Pennsylvania, Nebraska, Delaware and New Jersey) taxes telecommuters, so it's all taxable by NY. 

Reference:  https://taxnews.ey.com/news/2020-1411-new-york-senate-[product%20key%20removed]-businesses-to-treat-...

Which states (at New york): The Department of Taxation and Finance posted on
its website the following response to FAQs: “My
primary office is inside New York State, but I am
telecommuting from outside of the state due to the
COVID-19 pandemic. Do I owe New York taxes on
the income I earn while telecommuting?
If you are a nonresident whose primary office is in
New York State, your days telecommuting during
the pandemic are considered days worked in the
state unless your employer has established a bona
fide employer office at your telecommuting location.
There are a number of factors that determine
whether your employer has established a bona fide
employer office at your telecommuting location. In
general, unless your employer specifically acted to
establish a bona fide employer office at your
telecommuting location, you will continue to owe
New York State income tax on income earned while
telecommuting.”

[Nimood2021]

My payslips in 2020 all clearly show that I resident in NJ and work in NJ.  I assume my employer count me as a NJ employee (by mistake).  I also assume my name was provided by my employer to the NJ IRS and/or state of labor, not not to NY.   In other way, I am in the NJ system, not in NY system, presumably.  Should I still file both NY and NJ?  

[Nimood2021]

The payslips had been correct in 2019, live in NJ and work in NY.  W-2 in 2019 was good.  I only review the last payslip of the year normally to match with W-2, since it is automatic deposit for years.  I never request the change of work location, and I can not indeed.  And, I was never informed the change by mail and email.  Nevertheless, it happened.  If I file both NJ and NY, NY will be happy.  My worry is NJ.  Will NJ reject my filing and refuse to refund the overpaid, since  I will claim I made zero dollar in NJ, but NJ system will recognize me on payroll in NJ?  Thank.

[TomD8]

You did not "make zero dollar in NJ".

As @Hal_Al has stated, since you are an NJ resident, ALL your income is taxable by NJ, regardless of where you earned it.

Additionally, all the income you earned by working in NY is taxable by NY.

Therefore you must file two state returns: a non-resident NY tax return AND a NJ resident tax return.

You'll be able to claim a credit on your NJ return for the taxes paid to NY on the income that is taxed by both states, so you won't be double-taxed. 

[Nimood2021]

Can I pay estimated tax to avoid penalty?  However, based on my knowledge, estimated tax is for the income not subjected to withholding.  My case is zero withholding due to payroll wrong record.  Thanks.

[Hal_Al]

Yes and no.

You can still pay estimated tax on income (wages) subject to withholding if an insufficient amount was withheld.  The 4th Qtr payment is due Jan 15 (in most states).

Making a 4th qtr payment usually will not get you out of the underpayment penalty for taxes due for the first 3 quarters.

[DawnC]

Yes, you can always pay estimated taxes.  Since it is the beginning of the year, you should speak with your HR and get them to correct your payroll records for 2021 so that you don't have to deal with paying estimated taxes to NY.   They should be able to deduct and pay your taxes directly to the states involved, which if you do that now, you won't have an issue come year end.  

For 2020, it is probably too late to affect any penalty that has already been incurred since payments are based on quarters and you have nothing paid in the first 3 quarters.   You can still make a payment today or tomorrow that would cover the 4th quarter which may help.   Here is the website that you can do that at - Make a NY tax payment

[Nimood2021]

Many thanks!