My wife is employed by her Texas company on a project in Denver, CO. Her company told her that since she works more than 173 hours in a secondary state (state different from where you reside), the company will need to do withholding for those taxes.

They currently reimburse by creating a line code SIT GROSS UP to reimburse for these taxes, but doesn't that increase the salary so that more taxes are withdrawn?

Also, at year end, do we file a Joint State Return for Colorado? What wage do I put down even though we are paid through her employer which is in Texas where there is no state tax?

Hello fortewu. When the company calculates the gross up amount they should do it by dividing her anticipated taxes on the CO wages by (1- tax rate). This way after taxes on the gross up she nets out her original pay. For example - suppose the tax rate is 10% (it's not, but this makes the math easy) - then the gross up amount is her normal pay times (0.1/0.9). Thus for every $100 she earns they would gross it up by 100*(.1/.9) = $11.11. The tax on the total income of $111.11 at 10% is $11.11, which nets her the original $100. Make sense?

At year's end you will file a joint income tax form with CO, as non-residents. On that form you will have to document your total income as a couple, and also the portion that is due to CO sources, and the amount of tax you owe is calculated as the CO source amount divided by the total income as a couple, times the tax that you would owe IF you lived in CO. This way you are taxed only on the CO source income, but at a tax rate that is determined by your total income.

The fact that the employer is head-quartered in TX is immateral - what matters is (a) where the employee lives, and (b) where the employee works.