Fact or W2: which is more authoritative?

Considering the following facts:

- A taxpayer permanently moved out of MA in 2020 to CA
- She did not live or work physically in MA in 2021 (and 2022)
- She worked remotely from CA
- Her employer is in MA and her w-2 allocated the entire wages to MA
- Her employer refuses to issue W2C to zero out MA income (*)

* Many companies, Google for example, have policies to allocate income to the employee work location, not the actual location. The work location will not change until the employee is officially declared as a remote employee.

Given the situation,

- Can the employee win the appeal that she is not liable to MA tax? Suppose she can provide evidence that her move was permanent (home, husband, children in VACA, etc).
- Can MA insist that she pay MA tax solely because W2 has income allocated to MA.

In other words, can the facts overwrite the paperwork which is incorrect but for some reason cannot be changed?

PS: She could pay tax to MA and take credit for tax paid to other state in her CA resident return, but if CA found she does not really owe tax to MA, the credit would not be allowed, right?

I'm not sure about those two states but I am aware that CA can be difficult. Hubby's employer, based in IL hired a remote worker who lived in FL. Without telling anyone, he moved to SC. Hubby hired me to research. Employer is now liable to SC to do withholding and unemployment. Back taxes for SC unemployment had to be paid and employee is responsible to SC for the taxes on the SC wages that was not withheld.

Based on this, I believe that your client's income is sourced to CA and has to file as MA non resident to get a refund. you should probably contact both states department of revenue.

Employees who were allowed to work remotely and then moved out of state are causing their employer a lot of expense and extra work. I'm not surprised that many employers are stopping the remote work.

Check this:

https://home.kpmg/xx/en/home/insights/2021/07/flash-alert-2021-191.html

https://www.insidesalt.com/2021/09/massachusetts-department-of-revenue-stops-applying-covid-19-telecommuting-policy-returns-to-location-of-work-performed/

Does the employee fall within the Covid emergency timeline?
If not, according to the MASS.gov website:

If your employer mistakenly withheld Massachusetts income tax, file a Massachusetts Nonresident/Part-Year Resident Return, Form 1-NR/PY, to request a refund. Submit a letter from your employer along with the return, which verifies that you didn't work in Massachusetts.

Question...did your client not tell their employer that they moved?

The employer is generally required to register with the state DOL and start paying unemployment to that state right? I would think if things were done properly, the client would also have CA source wages and CA withholding on the W-2.

Does the employee fall within the Covid emergency timeline?

Howard, thanks so much for the info! Given the following facts:

- The state emergency declared 3/10/2020 and expired 6/15/2021.
- The employee became a MA nonresident on 3/6/2020 (which is on 2020 tax return). Technically he did not work in MA immediately prior to the Massachusetts COVID-19 state of emergency.
- Secondly, the employee never come back to MA, it is a permanent move.

What are the most reasonable state wages allocation? It does not make a personal difference to the taxpayer due to credit for taxe paid to the other state, but just which state get the tax dollars.

Sounds like MvT nailed it. TP did not inform employer of move.
I would source all the 2021 income to CA, none to MA.

mass.gov:

If you're a Massachusetts employer with a nonresident employee, you still need to withhold wages paid to the nonresident for services performed in Massachusetts. However, if a nonresident employee doesn't work in Massachusetts, even if they're paid from a Massachusetts office, you don't have to withhold.

Not that uncommon. He/she will file MA as non-resident and 0 wages attributed. And then CA for all.

Sounds like MvT nailed it. TP did not inform employer of move.
I would source all the 2021 income to CA, none to MA.

Howard: I agree with you that "source all the 2021 income to CA" is normal situation, but doesn't the emergency regulation change it? The wages earned during MA state emergency will be counted as MA income, or I understand the The emergency regulation incorrectly? Or the taxpayer is not subject to the The emergency regulation?

The link https://home.kpmg/xx/en/home/insights/2 ... 1-191.html that Howard provided says:

The emergency regulation, finalized March 5, 2021, applies to sourcing of wage income attributable to employee services performed March 10, 2020 through 90 days after the date the Massachusetts COVID-19 state of emergency is no longer in effect.

So the wages will be allocated to MA from 3/10/2020 to 6/15/2021 PLUS 90 DAYS? Does the other state agree?

Taxpayer did inform the employer, but they refuse to make the change stating that she was not officially declared as remote worker (now she is).

I think you are misreading the directive. The employee was a CA resident effective March 6, 2020, prior to the effective date of the Covid directive.
I'd rely on this part of the directive to say the employee is not subject to it:

and who is performing services from a location outside Massachusetts due to a pandemic-related circumstance.

He wasn't performing from CA due to the pandemic, he was performing from CA because he was a bona fide resident of CA.

Remember, the regulation was issued in October 2020 and made effective back to March 10, 2020 so there was a significant time lapse between the employee's move and the issuance of the regulation, so your employee was not gaming the reg. I think you have a strong argument the reg doesn't apply.

I think you are misreading the directive. The employee was a CA resident effective March 6, 2020, prior to the effective date of the Covid directive. ... He wasn't performing from CA due to the pandemic, he was performing from CA because he was a bona fide resident of CA.

Thanks Howard. March 6, 2020 is before effective date of the Covid directive but it is very close, only 4 days apart, so that makes me worry if the argument will stand. Does it help that the taxpayer did not come back after the Covid was over? I think that will be a stronger argument that "he was performing from CA because he was a bona fide resident of CA".

Is this for a 2021 return? What position did you take on the 2020 return (part year allocation or all MA)?
MA could challenge this citing the employer's withholding and remote worker effective date.
CA could claim the employee had no physical presence in MA when the directive went into effect and that MA has no claim.
Pick the fight that will be easiest to win if the tax liability difference is insignificant.

You said in your original post she worked remotely from CA but her home, children etc are in VA. Could you clear that up?

Is this for a 2021 return? What position did you take on the 2020 return (part year allocation or all MA)?
MA could challenge this citing the employer's withholding and remote worker effective date.
CA could claim the employee had no physical presence in MA when the directive went into effect and that MA has no claim.
Pick the fight that will be easiest to win if the tax liability difference is insignificant.

You said in your original post she worked remotely from CA but her home, children etc are in VA. Could you clear that up?

- My 2020 position is Part Year MA and Part Year CA, so it is consistent with 2021.
- My 2021 position is full year CA with all income allocated and nonresident MA with no income allocated. If MA challenges 2021, they will challenge 2020 too because they are consistent.

I think the key is if her move is Covid related. I will argue it is not because two reasons: (a) she moved before the state emergency, it is a coincident; and (b) she did not come back when Covid was over. My understand of the emergency regulation is for the situation that an employee temporarily moved to another state and comes back.

The worst case if all of her income in 2020, and income up to 9/15/2021 will be allocated to MA, and we take the credit in CA for tax paid to MA.

Could the worst worst case happen that she has to pay MA and CA does not allow the credit? The two states do not talk, the CA does not care what MA does and vice versa.

- VA is a typo for CA, and I have corrected the original post, sorry.

The consistent treatment without any blowback from MA is a good sign and IMHO, the correct treatment.

The consistent treatment without any blowback from MA is a good sign and IMHO, the correct treatment.

It did blowback. They modified the return according to the W-2 allocating all income to MA, and I am in the process of appealing.

Keep us posted...it's an interesting situation.

Keep us posted...it's an interesting situation.

My petition was approved. In my petition, I emphasized three key points:

1 - Timing of the move: The taxpayer relocated four days prior to the declaration of the state of emergency on March 10, 2020.
2 - Planned and permanent relocation: The timing of the planned move may be somewhat subjective, but the taxpayer did not return.
3 - Absence of motivation to avoid MA tax: The taxpayer paid taxes in CA.

While it's unclear which point resonated most, I suspect it was the first one. If the taxpayer had moved a day after the state of emergency was declared, she would have been subject to the emergency regulation even if all other factors remained the same. Hypothetically, in this scenario, both MA and CA would have the right to tax her: MA per the emergency regulation, and CA due to her status as an actual resident. This raises the question: could she receive a credit for tax paid to the other state? If so, which state would grant her the credit?

Returning to my original general question unrelated to this case: if a W-2 incorrectly allocates income to an incorrect state (let's call it state X), and the company refuses to correct this or issue a clarifying letter, can I still use this fact to support the return? How would I go about this? Typically, state X would require an explanatory letter from the company, but often this isn't possible. For instance, Google will not allocate income CA instead of the employee's actual work location if the employee worked at CA before, unless and until the employee is officially classified as a remote worker.

I had two cases in 2022 where the employee moved and didn't notify payroll in a timely manner. I allocated based on change of residence rather than w-2 allocation and the clients have not received any correspondence. Just do what is correct.

I had two cases in 2022 where the employee moved and didn't notify payroll in a timely manner. I allocated based on change of residence rather than w-2 allocation and the clients have not received any correspondence. Just do what is correct.

I agree what you did is correct, but it could be costly in terms of time and effort if the losing state challenges. On the other hand, if you do what the w-2 says, it is not likely to have a problem despite being incorrect. I face this dilemma and do not have a solution.