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We are residents of Pennsylvania. I work in Pennsylvania and my wife works in Delaware. Like many people working office jobs last year, we started working at home in mid-March 2020. My wife was actually not allowed by her employer to go to her workplace at all last year. My employer had us do an automated form to change our official place of employment--which is relevant, because I work in Philly, which has a wage tax, but we live in the suburbs, so I didn't have to pay the Philly wage tax during that period.

We didn't think about the location of my wife's employment, and her employer did not do a change of workplace like my employer did. But now that we prepare for the 2020 tax season, it occurs to me that it would be beneficial to pay Pennsylvania state income taxes instead of Delaware state income taxes on my wife's income. So some related questions:

  1. Does an individual who works at home pay income taxes based on where they work (Pennsylvania in this case) or where their employer's office is (Delaware in this case)?
  2. Who makes the determination about the employee's workplace? That is, does the employer have to have it on record that your workplace is outside the state the employer is in?
  3. Can an employer make this determination and correction retroactively?

This is not really relevant to the answer, but I think that paying PA instead of DE taxes is both fair and to our financial advantage. PA state income taxes are 3.07% flat, while DE's marginal tax rate is 6.60% for our tax bracket (source). In this case our financial advantage also seems to coincide with what is fair because we have not been using DE state or local services for the period in question. It seems that PA has a better claim on our tax dollars than DE.

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  1. A W-2 worker generally pays taxes on their wages where they live and where they work. These are usually the same state. In cases where they aren't, they usually pay non-resident taxes on their wages where they work, then receive a credit for those taxes paid to reduce the taxes owed to their resident state. (This excludes states that have reciprocity agreements which basically say we agree to only tax our residents, even if they work in another state.) The employer's office should have no relevance whatsoever unless the employee physically performs work there.
  2. Ultimately, the employee determines based on how they file their state income taxes. But they should be able to tell their employer where they work to adjust state withholding. Note that employers may be hesitant to do this if their payroll isn't set up to handle some states, or if it's temporary.
  3. Very unlikely. You'll probably have to sort this out on your tax returns.

In your case, you'll be filing a non-resident Delaware return and a resident Pennsylvania return. You'll need to determine days that your wife physically worked in Delaware, and allocate that portion of her wages to be taxed in Delaware. If her employer continued to withhold Delaware taxes, you should get a refund, but you may owe more to Pennsylvania. And make sure to claim the credit for taxes paid to Delaware on your Pennsylvania return.

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