Was wondering if anyone has run into this situation before and if so, how it was handled.
Client received a W-2 that shows $25,431.50 wages in box 1 of W-2. There is income shown in boxes 16 for two states - Kansas and Illinois - and also withholding shown for both of these states in boxes 17.
Illinois wages box 16 = 25,431.50 (same as box 1) and withholding of $762.95 in box 17.
Kansas wages in box 16 = 21,432.00 and withholding of $578.69 in box 17.
The client insists that he earned only $25,431.50 from this employer. He spent 5 days in Illinois for some training in 2008 (thus the reason for Illinois being involved) and then returned to Kansas (his state of residence before and after the days spent in IL) to work for this employer.
It appears to me, according to how the W-2 was prepared regarding the STATES that he had earned the sum of $21,432 (KS) + $25,431.50 (IL) $46,863.50 in wages according to the STATE information.
So, I obtained a phone number from the client for the employer to try to get a resolution. Now, I know that this information for the employee is just based upon what payroll was told, but this is how the employer's payroll person attempted to explain this situation:
Summarized: "Employee began his employment with us and was working and living in Illinois when he was hired (Feb 2008). Then, in March 2008, he continued to live in Illinois and started working in Kansas. Since he was now working in Kansas, we began withholding in Kansas and ADP looks at the 'worked in state' first for withholding, and if the 'lived in state' (still IL according to them) has a higher tax than the worked in state, it will withhold based upon that state."
I tried to explain to the payroll person that it was not possible to earn the same wages in 2 different states, but, she thought I was trying to explain tax law to her and she was not wanting to learn tax law! She did confirm to me that the $21,432.00 did represent the actual wages earned while working in Kansas and then, she did follow my logic to agree that the wages earned in Illinois would have been $3,999.50 ($25,431.50 - $21,432.00). She insists that he earned $25,431.50 in total gross wages from them and that the W-2 is right. (FWIW - note the employer uses ADP for their payroll .... and thus, the W-2's were prepared by ADP)
My question is how do I properly report this information on the client's tax returns? I am fearful that one of the two states (KS / IL) will not agree with the client's returns no matter how I prepare them. My thought is to report the $3,999.50 reported in IL (even though it disagrees with their state wages) and then report the $21,432.00 in KS and report the corresponding withholding. But, if Illinois matches IL wages to the taxpayer SSN - he will have underreported his wages on his IL return. Other option might be to tax the entire $25,431.50 in Illinois (prob higher tax rate) and just IGNORE the Kansas wages of $21,432.00 and show the KS withholding on the KS return (but, then if KS attempts to match his wages, he will have underreported his income in KS). Credit for taxes paid to other states is probably not going to apply in this situation as the employee moved out of Kansas to Texas (no state income tax) sometime after this job assignment was completed (and frankly, that is the least of my issues here anyway!).
I have asked the client to obtain a check history from this employer in case he is ever questioned by either IL or KS down the road.
Any words of wisdom from the group as to how to handle this situation re: preparation of the 2008 State income tax returns?
Thanks
Cathy Herber Ellsworth, KS