My Form W-2 lists 100% of my wages as Virginia state wages because I asked my employer to withhold Virginia tax as a convenience, but I only actually worked a small fraction of my days in Virginia -- can I still allocate my wages based on actual days worked instead?

Plain-English summary

A nonresident taxpayer filed Virginia nonresident returns for 2019 and 2020. Because he didn't know ahead of time how many days he'd end up working in Virginia during the year, he'd asked his employer to withhold Virginia income tax on all of his wages as a simple administrative convenience -- resulting in a Form W-2 that reported 100% of his wages as Virginia state wages. When the Department reviewed his return, it adjusted his nonresident allocation percentage to 100%, relying on that W-2 reporting, and issued an assessment recovering part of a refund he'd previously received for 2020.

The taxpayer appealed, pointing out that Virginia has a long-standing rule (going back to a 1985 published ruling) letting a nonresident allocate wages to Virginia using a simple ratio: the number of days spent performing work duties in Virginia divided by the total number of days spent performing work duties anywhere. He'd actually worked only 29 of 233 total work days in Virginia during 2019, and hadn't worked in Virginia at all during 2020. The Department agreed the W-2's state-wages box, while a useful data point, isn't conclusive proof of where income is actually sourced for tax purposes -- especially where, as here, the withholding pattern reflected the employee's own administrative request rather than an actual determination of where the work was performed. Since the taxpayer's days-worked calculation matched the Department's own established allocation method, both years' returns were processed as filed: the 2019 refund was issued, and the 2020 assessment was abated entirely.

What this means for you

Nonresidents whose employer withholds Virginia tax on all their wages for simplicity's sake

Don't assume the amount withheld (or the state listed on your W-2) locks in how much of your income is actually taxable by Virginia. If you work only part of your time in Virginia, you're entitled to allocate your wages using the days-worked ratio, regardless of what your W-2's state-wages box shows.

Anyone whose employer can't predict in advance how many days they'll work in a given state

It's common (and fine) to have an employer withhold conservatively as an administrative convenience when your work schedule across states is uncertain. Just be sure to calculate your actual days-worked allocation once the year ends and use it on your nonresident return -- the withholding pattern during the year doesn't determine your final tax liability.

Anyone disputing a Virginia adjustment based solely on W-2 reporting

This ruling is useful precedent: the Department itself acknowledged that a W-2's state-wages box is "not definitive proof" of proper income sourcing. If your actual work-location facts differ from what your W-2 shows, be prepared to document the discrepancy (like a calendar or record of days worked in each location) to support your own allocation.

Common questions

Q: How is a nonresident's Virginia wage income supposed to be allocated?
A: Using the ratio of days (or partial days) spent performing work duties in Virginia to the total days spent performing work duties everywhere for that employer -- a method the Department has applied since a 1985 published ruling.

Q: Does the "Virginia state wages" box on my Form W-2 determine how much of my income Virginia can tax?
A: Not definitively, according to this ruling. It's useful informational data, but the Department confirmed it isn't proof of correct sourcing on its own -- especially when the withholding was based on administrative convenience rather than an actual days-worked calculation.

Q: What if I don't know in advance how many days I'll work in Virginia during the year?
A: You can ask your employer to withhold Virginia tax as a precaution, as this taxpayer did. Once the year ends, calculate your actual days-worked ratio and use it to allocate your income correctly on your nonresident return -- you're not locked into whatever the withholding or W-2 reporting assumed during the year.

Citations and references

• Va. Code § 58.1-325 (nonresident's Virginia taxable income computed proportionally by Virginia-source income)
• Va. Code § 58.1-302 (income and deductions from Virginia sources defined)
• P.D. 85-134 (6/18/1985) (established the days-worked ratio for allocating a nonresident's wages to Virginia)

Subject

Residency : Nonresident - Virginia source income for Wages is Based on Days Worked

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-165

Original ruling text

December 28, 2021

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter submitted on behalf of your client, * (the “Taxpayer”), in which you appeal the partial denial of the refund claimed on his 2019 Virginia individual income tax return and an assessment issued for the taxable year ended December 31, 2020.

FACTS

The Taxpayer filed nonresident Virginia individual income tax returns for the 2019 and 2020 taxable years. Under review, the Department adjusted the 2019 return to change the nonresident allocation percentage to 100%. After the Taxpayer submitted a domicile questionnaire and supporting documentation, the Department agreed that he was a nonresident but concluded that the adjustment to the nonresident allocation percentage was correct based on a Form W-2 listing all of his wages as Virginia state wages. The Department subsequently made the same adjustment to the Taxpayer’s 2020 return and issued an assessment to recover part of the refund he had previously received. The Taxpayer appeals, contending the nonresident allocation percentage was computed correctly based on the number of days worked in Virginia.

DETERMINATION

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. The Virginia taxable income of a nonresident is defined under Virginia Code § 58.1-325 as “an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources.”

The Department has previously ruled that a nonresident who works in Virginia may apportion his salary to Virginia using a ratio of (1) the number of days or portion thereof spent in Virginia performing duties for his employer, divided by (2) the number of days or portion thereof spent anywhere performing duties for his employer. See Public Document 85-134 (6/18/1985).

It appears that in allocating 100% of the Taxpayer’s wages to Virginia, the Department relied solely on the fact that all of his wages reported on his Form W-2 were reported as Virginia state wages. While it is useful for informational purposes, the state wages box on the Form W-2 is not definitive proof that the income reported therein was properly sourced to the state shown. To determine the proper sourcing of income, reference must be made to all of the applicable facts and circumstances that may impact the analysis.

In this case, Virginia income tax was withheld by the employer at the Taxpayer’s request without taking into account the number of days the Taxpayer actually worked in Virginia. Because the Taxpayer was unsure how many days he would have to work in Virginia in any given year, he directed his employer to withhold Virginia income tax as an administrative convenience. Once the taxable year was over, the Taxpayer knew how many days he had worked in Virginia that year and reported the corresponding allocation percentage on his nonresident return.

The Taxpayer worked in Virginia for 29 days out of 233 total work days in 2019 and did not work in Virginia at all in 2020. The Taxpayer’s allocation using the ratio of days worked in Virginia to days worked everywhere was done in accordance with the Department’s policy. Accordingly, the 2019 and 2020 nonresident returns will be processed as filed. A refund will be issued accordingly for the 2019 taxable year and the assessment abated for the 2020 taxable year.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3908.X

Related Documents

85-134