I received an interesting question by way of a comment to my post ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC from October of 2007.
It is a specific tax question – which I do not answer here at TWTP. But it does bring up an interesting issue.
“I need your help. I'm a consultant. I have a NJ Corporation. My corporation subcontracts services through another NJ corporation. I do work physically in NYC but I have been withholding only NJ state income taxes from my wages. I am not filing a NY state tax return, only a NJ state tax return. My company is not registered to do business in NY since it does all its business with NJ companies.
When I started this position in 2005 my accountant at the time advised me that I did not have to pay NY state tax but should continue paying NJ state tax. My current accountant seems to agree but I now have concerns.
Can you please shed some light on this for me? And if I was supposed to be filing NY state returns, can I just amend my NJ returns and try to recover some of the credit from them? What can NY State do to collect the funds from me?
Anon”
This is, as I said, an interesting, but apparently not a unique, situation that happens mostly with computer consulting.
As I understand the situation presented NYC Company A needs a consultant to work on-site in its NYC location. It contracts with NJ Company B to provide this service. NJ Company B in turn contracts with NJ Consultant C, whose business is organized as a corporation, to do the work. I assume Company A pays Company B, and Company B pays Consultant C.
NYC Company A wants to avoid the expense of hiring the appropriate employee directly and paying all applicable payroll and benefit costs. NJ Consultant C wants to use employee benefits and other related expenses within the corporate structure to reduce the amount of income subject to FICA and income taxes. NYC Company A pays less total out of pocket then if it hired an actual employee – and NJ Consultant C gets to keep more money in pocket than if he/she was an employee of the company. So both parties come out ahead. Why NJ Company B is involved is a curiosity- other then as a way to put A and C together or in an attempt to “shield” Consultant C from liability for NY state income taxes.
Off the top of my head I would say that because all the work is done physically in New York State the wages are probably subject to New York State income tax.
The instructions for NY Form IT-203 (nonresident individual income tax return) indicate that you are subject to NY state income tax if “you have income from a New York source”. It goes on to say that New York source income includes income from “services performed in New York State”.
But it is a topic that requires further research – time-consuming research I am not willing to do on my dime. As I said above, I do not provide specific tax advice on individualized tax situations free of charge. As I am not accepting any new clients, I am not looking to earn a fee here.
I can tell you that if you are subject to NY state income tax you only have to pay on wages earned while physically in the State of New York. If you spend 4 days a week in NY at the client’s office and 1 day in NJ at your “home office” (if you qualify) doing paperwork or such you would only pay tax on the wages for the 4 days physically in NY. And if you attend a convention or conference, or any other work-related meeting or activity, that takes place outside of New York State you would not pay NY state tax on the wages allocated to these days.
And if you are subject to NY state income tax you can claim a credit on your NJ-1040 for the taxes paid to NY State. You would be able to amend your state returns to claim this credit for all “open” tax years (at this point 2007, 2008 and 2009).
If your current accountant says you do not have to pay NY state income tax I suggest you pay another tax professional for a documented “second opinion”. Your accountant may be correct, but you are right to be concerned.
And I would open the question to any of my tax pro readers who have experience with such a situation. You can let me know what you have to say either by submitting a comment or sending me an email at rdftaxpro@yahoo.com and I will include all responses in a future follow-up post.
TTFN
It is a specific tax question – which I do not answer here at TWTP. But it does bring up an interesting issue.
“I need your help. I'm a consultant. I have a NJ Corporation. My corporation subcontracts services through another NJ corporation. I do work physically in NYC but I have been withholding only NJ state income taxes from my wages. I am not filing a NY state tax return, only a NJ state tax return. My company is not registered to do business in NY since it does all its business with NJ companies.
When I started this position in 2005 my accountant at the time advised me that I did not have to pay NY state tax but should continue paying NJ state tax. My current accountant seems to agree but I now have concerns.
Can you please shed some light on this for me? And if I was supposed to be filing NY state returns, can I just amend my NJ returns and try to recover some of the credit from them? What can NY State do to collect the funds from me?
Anon”
This is, as I said, an interesting, but apparently not a unique, situation that happens mostly with computer consulting.
As I understand the situation presented NYC Company A needs a consultant to work on-site in its NYC location. It contracts with NJ Company B to provide this service. NJ Company B in turn contracts with NJ Consultant C, whose business is organized as a corporation, to do the work. I assume Company A pays Company B, and Company B pays Consultant C.
NYC Company A wants to avoid the expense of hiring the appropriate employee directly and paying all applicable payroll and benefit costs. NJ Consultant C wants to use employee benefits and other related expenses within the corporate structure to reduce the amount of income subject to FICA and income taxes. NYC Company A pays less total out of pocket then if it hired an actual employee – and NJ Consultant C gets to keep more money in pocket than if he/she was an employee of the company. So both parties come out ahead. Why NJ Company B is involved is a curiosity- other then as a way to put A and C together or in an attempt to “shield” Consultant C from liability for NY state income taxes.
Off the top of my head I would say that because all the work is done physically in New York State the wages are probably subject to New York State income tax.
The instructions for NY Form IT-203 (nonresident individual income tax return) indicate that you are subject to NY state income tax if “you have income from a New York source”. It goes on to say that New York source income includes income from “services performed in New York State”.
But it is a topic that requires further research – time-consuming research I am not willing to do on my dime. As I said above, I do not provide specific tax advice on individualized tax situations free of charge. As I am not accepting any new clients, I am not looking to earn a fee here.
I can tell you that if you are subject to NY state income tax you only have to pay on wages earned while physically in the State of New York. If you spend 4 days a week in NY at the client’s office and 1 day in NJ at your “home office” (if you qualify) doing paperwork or such you would only pay tax on the wages for the 4 days physically in NY. And if you attend a convention or conference, or any other work-related meeting or activity, that takes place outside of New York State you would not pay NY state tax on the wages allocated to these days.
And if you are subject to NY state income tax you can claim a credit on your NJ-1040 for the taxes paid to NY State. You would be able to amend your state returns to claim this credit for all “open” tax years (at this point 2007, 2008 and 2009).
If your current accountant says you do not have to pay NY state income tax I suggest you pay another tax professional for a documented “second opinion”. Your accountant may be correct, but you are right to be concerned.
And I would open the question to any of my tax pro readers who have experience with such a situation. You can let me know what you have to say either by submitting a comment or sending me an email at rdftaxpro@yahoo.com and I will include all responses in a future follow-up post.
TTFN
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