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I live in the StateA and work in the StateB as a Contract Employee. Every day, I commute to my work.

My Employer ( Contract Holding Company ) operates from StateC.

My clarification is, Whether my Payroll state income tax has to be deducted based on my Employment Location (or) my residence location (or) my employer's operational location.

At present, State Tax is deducted from StateC which is my Employer's operational location.

Additional information:

I live in NJ, work in NY. Employer is in MA (or) payroll is running from MA - Income tax

  • I live in NJ, work in NY. Employer is in MA (or) payroll is running from MA - Income tax. – goofyui Nov 28 at 14:37
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I believe that, in general, your work income would be taxed by both your state of work and state of residence, and you would claim a tax credit for taxes paid to one state on the doubly-taxed income on the other state's tax return. Whether the credit is claimed on the resident state or nonresident state depends on the exact pair of states. (In the case of New York and New Jersey, the credit is claimed in the resident state's tax return; in your case, you claim a New York tax credit for tax paid to New Jersey.)

I do not believe that you should be taxed by the state of the company's headquarters, if you do not work there.

  • I totally agree with you. It shouldn't be the Employer's location. I still need to get a confirmation, whether state tax should be based on state of employment (or) state of residence (or) both ? – goofyui Nov 29 at 18:36
  • My coworker who is on my situation mentioned me that in his payslip tax is deducted on both states - NJ and NY. – goofyui Nov 29 at 19:05
  • @goofyui: It generally would be both, because states generally tax residents on their worldwide income, while they tax nonresidents on income with a source in the state. So you file taxes as resident in your state of residence, reporting your income from out of state, and you file taxes as nonresident in your state of work, reporting your income from that state. But like I said, you can always claim a credit for taxes paid to the other state in one of the states, so you are not double-taxed (you effectively pay whichever tax is higher). – user102008 Nov 29 at 22:35
  • @goofyui: As for payroll tax withholding, just because they withhold doesn't mean you have to pay that much tax (and conversely just because they don't withhold for a state doesn't mean you don't have to pay tax to that state). You need to figure out which taxes you need to pay taxes to and how much by yourself. In future years, you will ideally adjust your withholdings in each state to match your actual tax liability as closely as possible, and hopefully your employer will help you withhold in the right states. – user102008 Nov 29 at 22:38
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    @goofyui: If it turns out that the other state tax credit is claimed on your resident state's tax return, which means that effectively you pay the work state's tax on your work income, then you should probably get your employer to withhold for your work state. – user102008 Nov 30 at 2:06

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