W-2 - NY and NJ

Admittedly, I don't have a ton of experience with employment tax nexus.

Fact: Client lives in NY. Works from home in NY for a company located in NJ. Client never sets foot in NJ during the year. Company issues a W-2 to client. Total wages are assigned to both NJ and NY. Only NY has state income tax withheld. e.g.

Box 1 wages $50,000
NJ state wages: $50,000
NJ state income tax: $0
NY state wages: $50,000
NY state income tax: $10,000

Client needs to file a NJ return and pay tax on the NJ source wages listed on the W-2? They would then get a state tax credit on the NY return. Correct?

Yes

The client's situation doesn't seem right to me, for two reasons.

First, if a NJ nonresident has wages that are fully taxable to NJ, then the employer is required to withhold NJ tax on those wages. Otherwise, the employee may be vulnerable to significant underpayment penalties on the tax on those wages.

Beyond that, NJ's general rule has been that wages are taxable in the jurisdiction where the service is performed, not the location of the employer. This general rule was temporarily suspended during the Covid era to make the wages of remote workers taxable in the jurisdiction of the NJ-based employer. That temporary suspension of the general rule was quietly terminated as of Oct 1, 2021, so that wages after that date should have been taxable only to the jurisdiction where the service was performed.

In this case, it seems like the employer went back to the general rule for purposes of NJ withholding, but not for purposes of proper identification of NJ-source wages.

COVID has confused things. Perhaps clarified things.

My understanding was somewhat similar to yours, that if a business has an employee out-of-state, they should register with that state for employment taxes and remit tax withholding to that state. Employee would only be taxed in their home state. Of course, there are exceptions.

It seems that income earned as an employee (W-2) is increasing being viewed the same way self-employed service income is. Case in point Bollinger v. Ala. Dept. Rev., Ala. Tax Tribunal, Dkt. No. INC. 22-390-LP, 03/08/2023.

In a nutshell, worked remotely from ID for an AL employer. Abandoned AL domicile and established domicile in ID. Took the position wages were not AL source. Lost with the tribunal. Wages were considered AL source as taxpayer was engaged in transactions for financial gain in AL.