State Tax Returns - Yes or No?

[SunTaxMan]

New client. Works multiple locations across USA. Sometimes a week, sometimes several months at a single location. Two locations in two different states in 2011, neither in his home state.

My thought is to file state tax returns based on income in each of those two states. He says his employer does not track his location and does not report any income in any state but his home state. (W-2 shows all income in home state.)

I am thinking employer has state employment responsibility in states where employees work, BUT employer is not my client.

Employee tracks location via expense reports. Employer pays per diem for food, and employee uses company credit card for expenses. Lodging is direct bill to employer. (Employee expense reports track location during the year (via car miles reported and reimbursesd.)

My thought is that a state income return should be filed for states where employee (my client) worked. Client says he has never done this and doesn't want to (based on "fact" that "employer is not tracking where he works.")

Am I missing something? Am I not seeing the woods for the trees?

Method of allocation - he commuted to both locations (weekly, home on weekends) for Jan - Sep and the other Oct - Dec. I see no reason not to simply allocate W-2 by 3/4 and 1/4 and prepare returns on that basis. Will he owe state income tax? Of course! With credit on home state return.

Thoughts?

Thanks.

[OldJack]

Reallocating state taxable income from a W2 is not common.

[SunTaxMan]

Old Jack,

"Reallocating?" Why do you use this term?

Taxpayer lives in MD - all income is subject to MD state tax, EXCEPT if and when there is a credit for taxes paid to another state. My only "allocating" is to the two states where the income was earned, which "allocation" (1) has not been made YET, (2) would definitely seem to be a requirement of the two states where taxpayer worked, and, (3) SHOULD HAVE BEEN DONE by the employer. My only "allocation" is to the states where income was earned.

Are you saying that because the employer did not "allocate" the income to where it was earned, I should not do so? Does the fact that the employer did not track on the W-2 where the income was earned (by state), make the taxpayer not responsible for filing state income tax returns in the states where the income was earned?

Doesn't completing this taxpayer's return WITHOUT correctly doing the state returns, where income was earned, open the door for unethical, erroneous behavior on my part?

And I realize this does not YET address the potential of local earned income tax or local wage tax issue in those local jurisdictions - an "allocation" I think I will not venture into, because the various local jurisdictions may be (1) multiple and (2) many more than just one place in each state - potential of resulting in a confusing number of local returns in each state. Then again, where do we draw the line at giving the taxpayer a "correct" and "complete" set of returns?

Are you saying that I should prepare the returns on the basis of the W-2, even if I know the W-2 is incorrect / incomplete?

Thanks,

[Medlin Software, Dennis]

I did not see the second state in your messages. Whether or not the employee is subject to non-MD taxes is based on the other state's rules and/or any agreement between the involved states. It could be the employer is ignoring their payroll responsibilities, is unaware of their responsibilities, or possibly because the employer is actually handling it correctly.

In my state (CA) wages earned here are subject to income tax here, even if earned by a non-resident, and even if the employer did not withhold and remit withholding to CA. Form is 540NR

Local taxes could certainly be a mess...

Personally, I would not trust the employer and would handle my taxes to the best of my ability, including filing in states other than those my employer reported to if needed. There could be repercussions with the employer as the W2 is not likely properly prepared...

[Pacun]

If the taxpayer lived in MD, he doesnot have to pay taxes in DC or VA. You should also check for reciprocracy agreements between MD and WV and PA if involved.

[SunTaxMan]

The non-resident states involved here are New York and New Jersey - both of which are "non-reciprocal" states with MD - meaning a credit is allowed in MD for taxes paid to those states.

[kcjenkins]

TR, you are right, but if the client does not want to file the states, you have to decide if you are going to fire him over it, or file it as all earned in MD. I'm assuming he's a new client, or else he never told you the details before? I do not think you should file a return that you KNOW to be incorrect, but on the other hand, the Fed return is correct, and the MD return is correct, so you have to decide how you feel about him not filing the other two returns.

[SunTaxMan]

Grand Poo-Bah,

Your perspective is just about the same as mine. I can file Fed and MD. These two returns are "correct," but I see no reason to do anything EXCEPT cover myself by preparing the Fed and MD and, in the cover letter to give him his completed returns to "spell it out" as it is, i.e., that both foreign states deserve and demand a return from him. Not filing those returns is HIS problem, not mine -- and it is, indeed, a problem.

The MD return would be affected ONLY by a credit for taxes paid to NY and NJ (or the absence of those credits). I am also thinking that I need to remind him of the three-year SOL on amending the MD returns by the filing of those two states - that if NY and NJ "catch up with him," he will lose any credit beyond the SOL in MD, but liability for NY and NJ will not expire with the SOL.

By the way, he is a new client, so I am not sure how many other states have been affected in the last several years that may have a claim on his money if they do find out he worked there and did not file.

Of secondary importance is the potential of offering my payroll services to his employer - and correcting this error with them --- but first things first -- especially since I am able to do payroll in all of the states where that employer would be / could be / has been working and in any and all local jurisdictions within those states. Could be a very lucrative payroll client!

By the way, thanks to all.

[OldJack]

Method of allocation - he commuted to both locations (weekly, home on weekends) for Jan - Sep and the other Oct - Dec. I see no reason not to simply allocate W-2 by 3/4 and 1/4 and prepare returns on that basis. Will he owe state income tax? Of course! With credit on home state return.

@SunTaxMan: I did not say to not file a state return. I said not reallocation of the W2. You would report the full W2 taxable on the issuing state and take credit for taxes paid on the other state (or the other way around). You don't split up the W2, or redo it (reallocate), and treat it as you think the employer should have reported it. Keep in mind that you may not have the correct information to decide 3/4 to 1/4. What if you are wrong?