One of the most complicated situations for an employee, or a payroll manager occurs when an employee lives in one state, but works in another. To help our readers understand what happens in this situation, we brought in Sam Kerch of Ask CPA Sam, to discuss the matter.
Sam starts off by explaining that the reason this situation is confusing is because you file your income tax where you live, however (most of the time) you have withholding where you work. While you may be saying, “Wait, so I’m paying taxes TWICE?!” hold on, Sam will further explain…
Generally, taxes are withheld in the location that you work. For example, if I live in New York but work in Connecticut, generally my taxes will be withheld in Connecticut. If your employer has a business presence in New York, you may need to have New York withholding as well. However, if my employer has no offices or presence in New York, the state has no way to ask that your employer withholds New York taxes from your paycheck. In this case, you may owe additional New York state tax. It’s always a good idea to check with your tax preparer to determine if you need to make estimated quarterly payments to avoid fines.
Lastly, Sam gives us a calculation for if the employer does need to withhold taxes for both sites:
- Calculate how much tax would be owed in New York was the only state
- Calculate withholding in Connecticut
- If the New York tax is higher, withhold the difference between the two
Remember, because you live in one place, you must file a return there. Because you had the second state’s tax withheld automatically from your paycheck (through your company), you will also need to file a return there. Some states also have reciprocity agreements, where the states in question have agreed to a unique arrangement for employees that live in one, and work in the other state. To easily calculate your withholding for both states, use the calculators on paycheckcity.com.
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These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.