If I live in one state and have my license/car registered there, but my payroll is taxed under another state, what is the greatest penalty I can face from the IRS?

[leeloo]

The IRS deals with Federal taxes, not state. This is an issue between states. If you live in one state and work in another, it depends which states they are. Some states have reciprocity, some give you a credit for taxes paid to another state. It is best to find the procedure for your states.

[xmasbaby0]

You should have a driver's license and auto registration in the state you live in.   If you work in another state then you may need to file a tax return for that state as well as a tax return for the state you live in.   But that will depend on what states---there are a few states without a state income tax, and there are states with reciprocal agreements.  You have not told us what states.   But as stated....the IRS does not concern itself with your state tax or your auto registration.   Only your state cares about that.  If you have two state returns to prepare, you do the non-resident state return first, then the return for the state you live in.

If you provide some details about which states we can be more helpful to you.   

Did you move from one state to another state?   Or just live in one state and work in another state?

[Hal_Al]

It depends on why is your "payroll is taxed under another state" and what are the two states.  

This is the general rule: The income is work state (WS) source income since it was earned there. Resident States (RS) tax all their resident's income, regardless of where earned. You will file a non-resident tax return for the WS and report the WS income. You will file a full year resident return for the RS, reporting all your income. The RS will give you a credit, or partial credit for any tax paid to the WS.

If you have a reciprocal state situation, the answer is different. See https://ttlc.intuit.com/questions/2895760-which-states-have-reciprocal-agreements

[bg1234]

I work for a company remotely and currently live in North Carolina. I am planning to move to Montana, however, my company does not have payroll established in Montana. 

As employees, when we move, we update our address in our work system and our filing status changes accordingly with whatever state we are moving to (permitting our company has payroll established there).

I want to keep my job but the only way to do that would be to keep my address listed as my parents address (they live in NC) in my work system.

I plan to move to Montana and change my license and auto registration when I get there.

At the end of 2023 when I file my taxes, is there a specific way for me to approach it? Are there penaltys associated with my plan above^

[TomD8]

@bg1234 --

When you move to Montana and establish it as your main, primary home (your domicile in tax terminology), all your income becomes taxable by Montana, regardless of where you earn it.  

https://mtrevenue.gov/2021/03/23/montana-residency-guide/#:~:text=You%20are%20a%20Montana%20resident....

Your Montana tax obligations are not based on whether or not your employer "has payroll established" there.

If your employer does not withhold Montana state tax from your pay after you become a Montana resident, you'll have to make quarterly estimated tax payments to Montana.

https://montana.servicenowservices.com/citizen/kb?id=kb_article_view&sysparm_article=KB0013201

[xmasbaby0]

"At the end of 2023 when I file my taxes, is there a specific way for me to approach it? Are there penaltys associated with my plan above"

Sounds like you might be confused about when you will file your tax return(s).   In early 2023 you will file a 2022 tax return.  If you do not live in Montana during 2022, then you file a federal return and a NC return.  If you move to Montana sometime in 2023---which is what it seems you are talking about, then in early 2024 you will file a 2023 tax return.  If you live in NC part of 2023 and move during 2023, then you will have two part-year tax returns to prepare---one for NC and one for Montana.  

Not sure why you are worried about penalties.  People move from one state to another all the time.  You are not penalized for moving.

[bg1234]

When I move, I will have to keep my address listed as the one  I am currently in - in NC- in my company's work system to keep my job.

My company cannot accomodate me and adjust my deductions if I were to move to Montana. They only do payroll for employees in a set list of states. Montana not being on that list.

[bg1234]

Okay, so in that case, if I were to move to Montana in 2023. In early 2024 when I file my taxes, would I complete one non-resident return for the income i earned in NC and one resident return for the time I lived in Montana, and then i would just pay the difference in whatever the taxes were? 

[xmasbaby0]

@bg1234 As explained by Champ TomD8, if your employer will not withhold Montana state tax from your pay, then you can pay estimated quarterly tax yourself to the state of Montana, then reconcile the amount you paid when you prepare your actual Montana tax return.    You are worried about a problem that is not really a big problem---it will just involve a little extra record-keeping on your part.

If, on the other hand, you are being untruthful with your employer about where you live, and are keeping your move to Montana a secret from them, that's a different story that is not tax-related.

[TomD8]

@bg1234 --

If you move from NC to MT in 2023, you will file a 2023 part-year resident tax return for each state.  Your income as an NC resident will be taxable by NC; your income as an MT resident will be taxable by MT.

TurboTax can easily handle this common situation.

[Hal_Al · Accepted solution]

Q. If I were to move to Montana in 2023. In early 2024 when I file my taxes, would I complete one non-resident return for the income i earned in NC and one resident return for the time I lived in Montana, and then i would just pay the difference in whatever the taxes were?

A. Yes, essentially. But, not exactly.  For 2023, you would  file a part year resident return for each state. For 2024 and beyond, you file resident MT and nonresident NC.

If you do not live in NC and do not physically work there, technically you do not owe any NC tax on the income (except for the part of the year you physically worked there). But your employer, doesn’t know that and will continue to withhold NC tax. Technically, you should claim a refund of that portion of the NC withholding when you file your part year, or nonresident, NC return, instead of claiming a credit on your MT return.

My opinion is that your employer is being unreasonable, in not accommodating you.  All they have to do is not withhold for any state (stop withholding for NC) and let you deal with MT taxes. They have no legal obligation to withhold MT tax. After the 2023 move, you would not need to file NC for 2024 and beyond (unless you occasionally work there).

[bg1234]

I really appreciate your answer it helps a lot! It sounds like, if my company does not accomodate my address change to Montana, I would just need to get a refund back for the NC state tax I paid in 2023 and use it towards the MT tax I owe (let's just say I move to MT 01/01/2023 in this scenario)

Is this pretty easy to accomplish through TurboTax? I am trying to avoid accidentally paying double taxes. The NC address I would be using for my work - even after I move - is my parents address so it's not really just any random strangers address luckily. 

[Hal_Al]

Q. It sounds like, if my company does not accomodate my address change to Montana, I would just need to get a refund back for the NC state tax I paid in 2023 and use it towards the MT tax I owe?

A. That's correct.

Q. Is this pretty easy to accomplish through TurboTax? 

A. I'm not specifically familiar with the NC software.  So, this a generalized state answer.  The state interview for a nonresident asks you to allocate your income as NC or not NC income.  You may have to use a workaround, since your W-2 will say NC in box 15.  

 At the w-2 screen split the boxes 15-20 W-2 info into 2 lines. On the 1st line leave NC in box 15 but make box 16 blank; leave the NC withholding in box 17. On the 2nd line put MT in box 15 and the state wages amount in box 16; leave box 17 blank..

[TomD8]

To use your hypothetical scenario:

If you become a MT resident on 1/1/2023, then at year's end you will file a resident MT tax return.  If your employer does not withhold MT income taxes for you in 2023, then you must make quarterly estimated tax payments to MT during the year.  Once you become an MT resident all your income becomes taxable by MT.

If, after your move (and assuming you never work in NC in 2023), your employer incorrectly continues to withhold NC taxes, then at year's end you'll have to file a non-resident NC tax return, on which you report the withholding but declare zero NC income.  This will result in NC refunding the incorrectly withheld taxes to you.

Your residency for tax purposes is not determined by the address you put on your tax return.  It is determined by the actual facts and circumstances of your situation.  The address on your tax return simply tells the taxing authority the address they should use in case they need to contact you.