Confused about state withholding for remote work and unemployment insurance.

[ptomblin]

For the last 5 years, I've been living in NY but doing remote work for a company in MD. I've always set my state withholding in MD to zero and made estimate tax payments in NY, and only filed NY taxes. But in 2017 my contract ended and I went on MD unemployment. But when I entered my 1099-G for the unemployment, Turbotax wanted me to file a MD tax form. Now I'm confused as to whether I should have been filing non-resident MD tax forms for all five years?

[DanielV01 · Accepted solution]

Your filing was correct and you do not file a Maryland return this year either.  First things first:  unemployment income is only taxable to the state where you are living in at the time when you receive it.  You do not need a Maryland return for unemployment (unless you were living in Maryland when you received it.)

Did you need to file a Maryland nonresident return for past years?  No, unless you were physically present in Maryland when you worked there.  Maryland does not tax telecommuters who are working remotely from outside of Maryland.  

Had the situation been reversed (living in MD, telecommuting to NY), you would have needed a nonresident return for New York.  New York does tax the telecommuter working from outside the state on the convenience of the employer principle.  

But you did not need Maryland nonresident returns for those years and will not file one this year either for the unemployment.  (Note:  if you have rental or some other income derived from inside of Maryland, you would need a return for that type of income).

[ptomblin]

But <a rel="nofollow" target="_blank" href="http://forms.marylandtaxes.gov/17_forms/Nonresident_Booklet.pdf">http://forms.marylandtaxes.gov/17_f...> section 4 says "In general, you must file this return if ...  you received income from sources within Maryland". The company that paid me was in Maryland, even if the work I did was in New York. It doesn't seem cut and dried to me.

[DanielV01]

Regarding the unemployment, note the following from that same booklet:  Refunds of state or local income taxes, pensions, annuities, IRA distributions, UNEMPLOYMENT INCOME and Social Security or Railroad Retirement benefits are not considered to be from Maryland sources for income tax purposes when these items are received by a nonresident of Maryland. Adjustments to federal gross income are not generally applicable to Maryland unless they pertain to business carried on in Maryland or services performed in Maryland. (I added the capitalization).  The reference can be found on page 4, section 11 (page 7 of the pdf document).

[DanielV01]

As far as the "income from sources in Maryland" is concerned, Maryland has continued to accept income DERIVED in Maryland as being income earned while PHYSICALLY WORKING there.  You are right that it is not clear-cut, which is why some states tax the telecommuters who are working from outside of the state (such as New York).  But Maryland does not do so.

[ptomblin]

Thank you, you've been most helpful.

[DanielV01]

My pleasure.

[Anonymous]

TurboTaxDanielV,

Section 4 in that document states:

In general, you must file this return if:
• You are a nonresident of Maryland,
• AND, you are required to file a federal return based upon
the income levels in Table 1 or 2, ***income greater than a certain amount***
• AND, you received income from sources within Maryland

What are you basing the statement of "Maryland does not do so" (tax telecommuters)  off of?  It would be extremely helpful to have supporting documentation and or further details into why these interpretations are made.  If not, its just us taking your word for it.

[Anonymous]

Daniel,

Maryland sent me a notice that they want my refund back.  I work remotely as a telecommuter for Maryland University.  I live in California and work 100% online, have never been or plan to go to MD

I am in the midst of writing my letter to MD stating why I don't owe taxes in MD.  The only evidence I can find to support your statement "No, unless you were physically present in Maryland when you worked there.  Maryland does not tax telecommuters who are working remotely from outside of Maryland," is the Maryland Non-resident tax return booklet https://forms.marylandtaxes.gov/current_forms/nonresident_booklet.pdf  see page 1, item #3. "A nonresident individual is subject to tax on that portion of the federal adjusted gross income that is derived from tangible property, real or personal, permanently located in Maryland (whether received directly or from a fiduciary) and on income from a business, trade, profession or occupation carried on in Maryland and on all gambling winnings derived from Maryland sources."

Since my occupation is not carried on in Maryland, it is carried on in California, I should not need to pay Maryland taxes. 

Is there any other support, laws, proof I can use to help?

Thanks so much!!

[DanielV01]

@Anonymous  Maryland is asking for proof that your income is not taxable in Maryland.  As I provided in my original answer, only 5 states have been using the "convenience of the employer" principle to tax a telecommuter working for a company within the state, although the telecommuter lives outside of the state:  New York, New Jersey, Pennsylvania, Delaware, and Nebraska.  Maryland has not done so up until this point.  I did research and did find comments from a gentleman working outside of Maryland who telecommutes for Johns Hopkins.  Maryland was challenging that his income was taxable inside of Maryland, but acquiesced when he proved that he was working from home (a state that does not assess income tax).

Maryland is not forthcoming about this in their tax booklets.  The reference you cite states that they can tax your "income from a business, trade, profession or occupation carried on in Maryland..." Until now, however, Maryland has not considered a telecommuter to be obtaining income from an occupation carried on in Maryland if you are telecommuting from outside of it.  However, it is possible that since you had Maryland withholdings from a Maryland-based company (or organization), the audit division has flagged your return.  

What hopefully will satisfy them:  A copy of your Teleworker (or Telecommuter) agreement, proof of California residency (copy of driver's license, mortgage statements or lease agreement or something similar), and perhaps a copy of your California resident return.  If you prepared the return through TurboTax, you may also visit the TurboTax Audit Support Center to receive any needed assistance.