Double reporting of income on the state portion of the W2
Many of our clients work in more than one state. If your home state is one of those that have a tax rate higher than your work state, you are often left to make up the difference either by making estimated payments during the year or when you file your tax return after the year ends. If you wait to pay the difference when you file your return you could potentially be subject to underpayment interest or even a late payment penalty.
And as our workforce becomes more mobile, and as more states began to tax remote work for firms in their state, this will become a more common problem for taxpayers whose income span more than one state.
One of the easiest ways to solve this is for the employer to report and withhold the earnings not only for the work state but also for the individual’s home state. This allows the employer to withhold taxes for both the home state and work state to help alleviate this difference. Some states like Michigan already mandate this, most all of the other states do not have a problem with this arrangement, but others like Illinois and Alabama are not set up to handle this kind of reporting. Illinois, especially, needs legislative approval to allow this and Alabama has a rule that frowns upon this practice. This doesn’t mean that your tax return cannot be filed in the states when there is reporting for both the home and the work state that overlaps on the W2.
If your preparer has a problem with this, it’s not because the employer that gave you the W-2 is at fault, it is the tax preparer who is not used to dealing with multistate returns that doesn’t know how to tweak their software to make this work. To process the Illinois returns that have this kind of reporting, you will need to get a letter from their payroll stating that the income was not earned within Illinois but that it was earned outside of Illinois. Unfortunately, the Illinois return will have to be mailed but it doesn’t require the employer to restate the W-2. For Alabama, it’s just a matter of knowing how to work the tax software and if Alabama wants to reject the out of state tax credits, a letter from the employer will be all that’s needed to solve in a reply.
TravelTax been handling multistate and cross-border tax returns since its inception and this has never been an issue in our practice. We receive many calls from tax professionals asking for help or even insisting that we have the agency fix the W2. While it’s flattering to think we have that much power in the industry, the fact of the matter is that are simply a tax office and not a staffing agency :-).
We are more than willing to handle returns with this kind of reporting and accept referrals from other tax offices that seek assistance.