Errors on a W-2 can lead to frustration and complications during tax season. A frequent issue arises when an employee’s W-2 shows income tax withheld for a state other than their state of residence. This typically happens when an employee resides in one state but works at an office or job site located in another state.
Does It Matter If the W-2 Lists the Wrong State?
Indeed, it does. Generally, an employee is responsible for paying state income taxes in the state where they reside. For example, if an employee lives in Maryland (MD) but their W-2 indicates that income tax was withheld by their employer in Virginia (VA), they will need to address this discrepancy when filing their personal income tax return (Form 1040).
How to Correct the Issue Moving Forward
In the example above, the employer should review the employee’s tax settings in their payroll system to reflect MD as the applicable state for income tax withholding. This will ensure that moving forward, MD taxes are properly withheld from their paycheck.
How to Handle the Current Tax Situation
For the current tax year, the employee will need to address the discrepancy when filing their personal income tax return:
- While filing their tax returns, the employee should specify their residence in MD.
- This will result in the employee's tax liability being allocated to MD, which will likely require them to pay the appropriate taxes to MD.
- If applicable, this would trigger a refund of the previously deposited taxes to VA by the employer.
Please consult a tax preparer for guidance on ensuring accurate filings.
Final Takeaway
Payroll errors like this can be fixed, but they require both employer adjustments and employee action during tax season. Ensuring state tax information is correct in payroll systems helps employees avoid unnecessary tax complications and ensures compliance with state tax laws.
If you’re an employer, double-check tax settings to prevent future issues. And if you’re an employee dealing with this, consult a tax professional to ensure you’re filing correctly.
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