Business registered in NJ, single employee mostly works in NY. Where to withhold?

[DebitThatCreditThis]

New to payroll and assisting a client get set up on Gusto.

Client recently formed set up an S Corp (registered / headquartered) in NJ. However, the majority of his work (95%) is performed in NY.

As the sole employee (/owner), I assume he is going to have to run payroll in both states, right?

Bear in mind, he is a part year resident of both NY (40%) and NJ (60%).

My line of thinking after some research:

• Looks like the biz will need to file as a foreign entity in NY since the biz "transacts business within the state" (he'll receive a 1099 for work performed in NY)
• Once the biz registers as a foreign entity in NY, it will be subject to the state's W/H rules: "If you are an employer as described in federal Publication 15, Circular E, Employer's Tax Guide, and you maintain an office or transact business within New York State, whether or not a paying agency is maintained within the state, you must withhold personal income tax." per https://www.tax.ny.gov/bus/wt/whtax_require.htm

One of the managers at my firm said we only need to w/h for NJ, the income can just be allocated on the 11120 S return, and she had to think about whether it was necessary for the biz to register as a foreign entity in NY.

However, I think the foreign entity registration opens up the NY W/H requirements (thereby doubling his Gusto bill lol)

[Uncle Sam]

Here's a link to the NJ Division of Taxation that can probably help you with NJ tax issues -

https://www.state.nj.us/treasury/taxation/

[Lion]

Do NOT issue a 1099 to an employee/shareholder. DO register the S-corp in NY as a foreign corporation. DO withhold where the work is performed. Both states. Based on time spent or $$ earned or... DO file the S-corp in both NY and NJ. Employee/shareholder DOES file NR in NY and Resident in NJ.

HOWEVER, you said the shareholder moved from or to NJ and for 2022 is a PY NY resident and PY NJ resident??? If so, he'll have a PY NY return with a corresponding NR NJ return for any work performed in NJ while a NY resident. Then a PY NJ return with a NR NY return for any work performed in NY while a NJ resident. You might want to draw a timeline!!!

https://www.tax.ny.gov/bus/

[DebitThatCreditThis]

Do NOT issue a 1099 to an employee/shareholder. DO register the S-corp in NY as a foreign corporation. DO withhold where the work is performed. Both states. Based on time spent or $$ earned or... DO file the S-corp in both NY and NJ. Employee/shareholder DOES file NR in NY and Resident in NJ.

HOWEVER, you said the shareholder moved from or to NJ and for 2022 is a PY NY resident and PY NJ resident??? If so, he'll have a PY NY return with a corresponding NR NJ return for any work performed in NJ while a NY resident. Then a PY NJ return with a NR NY return for any work performed in NY while a NJ resident. You might want to draw a timeline!!!

https://www.tax.ny.gov/bus/

Lion, you are the best!

Regarding the residency issue, here's the situation:

Client moved into NY 8/22 but still maintains a domicile in NJ (where he spends 60% of his time).

This 40/60 split (NY/NJ respectively) will remain constant going forward.

Do I have this right:

For 2022 onward: Part year resident return for NJ and NR Return for NY

[kathyc2]

For 2022 onward: Part year resident return for NJ and NR Return for NY

Why would he be a part year NJ resident? Being a part year resident implies that he was a resident of another state part of the year, which is not what you have said.

[DebitThatCreditThis]

Why would he be a part year NJ resident? Being a part year resident implies that he was a resident of another state part of the year, which is not what you have said.

So would a Resident NJ return + a Non Resident NY return be appropriate treatment?

And since he lived in NJ for say 220 days and NY for 146 days, you would just break out that allocation on the NJ Resident Return and the NY Nonresident Return?

[kathyc2]

So would a Resident NJ return + a Non Resident NY return be appropriate treatment?

I'm not familiar with either of those states such as if there is any kind of a reciprocity agreements, but in general you file as a resident of state you live in and non resident on income derived in a state where you don't live.

[Lion]

No reciprocity. Been a long time since I've prepared any NJ returns. Yes, NJ resident, taking a credit for taxes paid in NY. NY non-resident return starts with Federal numbers, you'll see the columns for NY-sourced income/deductions. His W-2 for NY and probably his K-1 SE income should flow in your software from Federal to NY NR, but check the lines to make sure the NY-sourced income is designated. Also, if he has a "permanent place of abode" for 10 months or more in NY, make sure he tracks his days in NY. A NY day is any minute over the border, whether for biz or personal. Be careful of cell phone usage, because some systems (Verizon, I'm told) will ping off the strongest tower, not necessarily the closest, and erroneously label his phone/him in NY when he might be in NJ or CT or... By the way, NY and maybe NJ have pass-through entity taxes (PTET) where the PTE pays a tax for employee/shareholders that gets passed along to them via the K-1 and is a credit (a % of the tax paid) on the personal state return. Both NY and NJ are aggressive in assuming residency, so make sure your client has his ducks in a row. Tax Practice Pro (John Sheeley's firm) has frequent multi-state webinars. And, I know a couple of great multi-state tax lawyers, if your client gets in trouble!!

The NYS return instructions used to cover residency and non-residency pretty well. Here's a 2022 rule revision: New Audit Guidelines in New York: A Change to the 11-Month Rule | Hodgson Russ LLP - JDSupra

[DebitThatCreditThis]

No reciprocity. Been a long time since I've prepared any NJ returns. Yes, NJ resident, taking a credit for taxes paid in NY. NY non-resident return starts with Federal numbers, you'll see the columns for NY-sourced income/deductions. His W-2 for NY and probably his K-1 SE income should flow in your software from Federal to NY NR, but check the lines to make sure the NY-sourced income is designated. Also, if he has a "permanent place of abode" for 10 months or more in NY, make sure he tracks his days in NY. A NY day is any minute over the border, whether for biz or personal. Be careful of cell phone usage, because some systems (Verizon, I'm told) will ping off the strongest tower, not necessarily the closest, and erroneously label his phone/him in NY when he might be in NJ or CT or... By the way, NY and maybe NJ have pass-through entity taxes (PTET) where the PTE pays a tax for employee/shareholders that gets passed along to them via the K-1 and is a credit (a % of the tax paid) on the personal state return. Both NY and NJ are aggressive in assuming residency, so make sure your client has his ducks in a row. Tax Practice Pro (John Sheeley's firm) has frequent multi-state webinars. And, I know a couple of great multi-state tax lawyers, if your client gets in trouble!!

The NYS return instructions used to cover residency and non-residency pretty well. Here's a 2022 rule revision: New Audit Guidelines in New York: A Change to the 11-Month Rule | Hodgson Russ LLP - JDSupra

This is great information, thank you so much.

[TAXNJ]

So would a Resident NJ return + a Non Resident NY return be appropriate treatment?

And since he lived in NJ for say 220 days and NY for 146 days, you would just break out that allocation on the NJ Resident Return and the NY Nonresident Return?

fyi

https://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git6.pdf