Tax Question - need help

[merekc]

A friend got a letter yesterday that they didn't pay state taxes for 2005. This is her first notice of this that she is aware of. She won't be able to talk to her tax preparer until Monday, so I told her I would go to the Dis see what you think.

She was an independent contractor working out of her home in State A. She never went into the office of the company she worked for.

She contracted with a company in State B. State B is the one sending the letter saying she owes them taxes.

Her tax records do not show that she owed any money to State B and in thinking it through she doesn't think she would owe State B since she didn't work in it.

Does this scenario sound like she should have paid taxes in State B?

She will of course be calling her tax preparer on Monday so this is more of our curiosity not being able to wait.

 

[disneylove69]

I worked in Texas for a company that based in Massachutes. I then moved to California the following year after January 1st. I got a letter from California saying I didn't pay taxes. I told them I didn't have permanent residence in that state. I didn't have to pay.

I would say if she didn't hold permenant residence in state B she wouldn't have to pay. I am not a tax consultant just did the similar situation.

 

[dizziedupbaby0127]

I am only a level 1 tax preparer so I am not a 100% but I believe that if you work for a company in state b even if you live in state a and never cross over to state B you still owe state b taxes. State B is where the company is registered, which means that is the state the income came from. If you make income in any state you would need to file a state return with that state (of course only if your required to do so, by the amount of income you made).

It's not a huge deal or anything to worry about. Her tax preparer will look it over and if she does need to file, they will do an amended state return and the tax preparer SHOULD, cover any penalties she might have to pay from that state. The tax preparer should have known she needed to file that state also. GoodLuck!

 

[mrsklamc]

I believe when this has come up on the DIS before it has depended on the individual states.

 

[MommyJack]

I deal with this issue almost every year. I live in Rhode Island and work only in RI, but my company is based in MA. My company withholds MA taxes from my check even though I don't owe MA taxes. When I first started with them and they withhold MA taxes, I called my CPA to ask if this was right. He told me to have them change it. As long as I never do any work in MA, I don't owe MA any taxes. Well my company gave me some lame excuse as to why it couldn't be changed. So every year I need to file a MA tax return, get a refund of what was withheld and then pay RI.

The first year I did this MA claimed that I owed them because my W-4 says I work in MA. I had to have my company write a letter stating that I do not work in MA. Every year I submit that letter to MA with my return. It takes longer than usual, but I always get my $ back from MA. Finally, this year I called human resources at my company and told them I was sick of waiting six months every year to get back my $ from MA. I guess I got the right person, because they agreed to change it. Unfortunately, the change won't take affect until 2011.

Anyway, my understanding is that as long as the income is derived from work in state A, you don't owe taxes to state B just because that is where the company is located. So I guess it really depends on what the nature of her work is.

 

[Cruise]

As others have stated, it depends on the state in question.

Some states will require your friend to file a return even if she's entitled to a "credit" from that state for being a resident of another state. She'll basically end up filing stating that she owes X amount of taxes, but that she gets a credit for paying X amount of taxes in her resident state and thus has a $0 liability.

In any case, the letter was most likely computer generated because State B received information from the employer that she was earning money but their files have no record of her paying taxes. Her tax preparer will have to, at the very least, send a letter to clear up the matter or, if State B requires it, file a 2005 tax return for her.

 

[seashoreCM]

Genereally if you live in state A and don't set foot in state B even though you work for a company based in state B then you don't owe state B any tax.

But in some cases where you wouold normally woark atr the company site in state B but the company gives you a choice of doing some of the work at home you may have to pay tax on the entire income.

What probably happened here is that the company kept its records as if you worked in state B.

You can write a letter claiming that you don';t owe any tax for the reasons above.

State A usually gives you as a resident some credit for income tax paid to state B (where you worked) but it seems taht in this case it is too late to file an amended state A return to reflect a sudden tax bill for state B.

 

[merekc]

Thanks so much for everyone's feedback. Since she was an independent contractor who works from her home (not an employee), I think based on the feedback she is probably okay. Again, she is just trying to get a feel of how this will shake out since she won't be able to talk to a tax person until Monday.

The reason this would be worse than a typical situation is that as an independent contractor she is responsible for paying all of her taxes unlike working from a company that has already removed X amount of tax money. So if for some reason she is in the wrong it could be a substantial amount of money, especially since they are notifiying her 5 years after the fact and she has filed her taxes for several years since then this same way.

We figure the state is just trying to find any possible money owed them in these days of tighter budgets.

 

[disneychrista]

Since you do no work in State B then you shouldn't owe tax in that state.

Now if you worked in State B & lived in State A, you could end up paying tax in both.

 

[ancestry]

I live in Maine and work for an University that is based in Massachusetts. I teach online and don't physically work in the state of Massachusetts. I have to pay state taxes to both Maine and Massachusetts although not at the same rate. It completely stinks because I am technically an independent contractor and not an employee but the University still has to take out taxes which forces me to pay to state tax to Massachusetts as well.

However, as others have said this really does vary depending on the state. So your friend may actually have to pay back taxes but the tax preparer really needs to figure out the different state laws that were in effect in 2005.