I worked remotely as a 1099 in CA for 6 months from my home in Nevada. I never set foot in CA. The company I worked for withheld $13,044. I was assured by them that I would get that all back. My withholding was reported on a CA Form 592-B. Now that my taxes are complete my CA refund is only $3541. To the best of my knowledge I've made no mistakes and noted where asked that I was in NV the entire year. Why am I not getting all my withholding back? Thanks in advance for the help.
You were misinformed. California will tax that income.
If all your work is actually (physically) performed in your state of residency and you never physically work in any other state, then you would have NO "other state income. "Currently, the only exception to that is California. Due to a 2019 court ruling in CA, if you are a sole proprietor and you provide services to a client located in CA, that income is taxable by CA - even if you never set foot in California.
You were misinformed. California will tax that income.
If all your work is actually (physically) performed in your state of residency and you never physically work in any other state, then you would have NO "other state income. "Currently, the only exception to that is California. Due to a 2019 court ruling in CA, if you are a sole proprietor and you provide services to a client located in CA, that income is taxable by CA - even if you never set foot in California.
The issue not where you performed the services, but in what state the benefit was received.
Even if you never set foot in California, as an independent contractors, if you are performing services for a California-based customer, you have an economic nexus with the state and you are likely doing business in California for income tax purposes.
What is you are a W-2 employee who works remotely in another state(MA) for a CA corporation. The corporation insists that because my boss is located in SF and my original contract stated that my home base was SF, that they must withhold CA taxes even though I do not intend to return to CA and have made all the changes to consider myself a MA resident (car registration changed, voter registration changed, signed a long term apt lease, doctors and dentists now located in MA etc). Can i
ever establish MA residency while working for this CA company?
@McCartF --
"Can i ever establish MA residency while working for this CA company?"
Of course you can. People move from one state to another every day.
If you abandon your domicile in CA and establish it in MA, then for tax purposes you become a non-resident of CA and a resident of MA. See Change of Domicile on page 10 of this CA tax publication:
https://www.ftb.ca.gov/forms/2021/2021-1031-publication.pdf
CA taxes non-resident W-2 employees only on CA-source income. W-2 income is sourced where the work is actually (physically) performed. The W-2 income of a CA non-resident who never physically works in CA is not subject to CA income tax.
Your state tax obligations are determined by where you live and work, not by the location of your employer.
Therefore, if you become domiciled in MA and you perform your work only in MA, your employer should withhold MA income tax, not CA income tax. If your employer will not withhold MA income tax for you, you'll have to make quarterly estimated tax payments to MA.
Finally, California law does not require employers to withhold taxes for non-residents who perform no services within California. See FAQ #15 in this CA tax reference:
https://www.ftb.ca.gov/forms/misc/1017.html#1017-12
@TomD8 Hope you've been well! I agree with you here, mostly.
California is a physical presence state as it relates to W-2 employees. You are only taxed on days you worked for your employer within the State of California. It doesn't matter if your primary office and boss are located in California, it is not one of the five states with a telecommuting/convenience law (Arkansas, Delaware, Nebraska, New York, and Pennsylvania are the only ones). Connecticut is technically a physical presence state, but as of 1/1/2019 they will honor tax credits for residents subjected to the convenience rule in other states.
HOWEVER, Massachusetts enacted temporary sourcing rules during the pandemic:
Pursuant to the regulation as extended, until 90 days after the state of emergency in Massachusetts is lifted, all compensation received for services performed by a non-resident who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee engaged in performing such services in Massachusetts, and who began performing services from a location outside Massachusetts due to a Pandemic-Related Circumstance, will continue to be treated as Massachusetts source income subject to personal income tax under M.G.L. c. 62 and personal income tax withholding.
The regulation also provides rules for non-resident employees who, prior to the Massachusetts COVID-19 state of emergency, determined their Massachusetts source income by apportioning their days spent in Massachusetts in accordance with 830 CMR 62.5A.1(5)(a). Pursuant to 830 CMR 62.5A.3(3)(b), such non-resident telecommuting employees must determine the portion of their wages that constitutes Massachusetts source income during the Massachusetts COVID-19 state of emergency based on either (1) the percentage of their work days spent in Massachusetts during the period January 1 through February 29, 2020 as determined under 830 CMR 62.5A.1(5)(a), or (2) if they worked for the same employer in 2019, the apportionment percentage properly used to determine the portion of their wages from that employer that constituted Massachusetts source income as reported on their 2019 Massachusetts personal income tax return.
This regulation was in effect until September 13, 2021. Meaning its possible that CA companies, under MA temporary regulations, could have treated any income earned from 1/1/2021-9/13/2021 as CA based income if that was where the employer worked pre-pandemic.
"Meaning its possible that CA companies, under MA temporary regulations, could have treated any income earned from 1/1/2021-9/13/2021 as CA based income if that was where the employer worked pre-pandemic."
I think you meant to say that MA companies, under MA temporary regulations, could have treated any income earned from 1/1/2021 to 9/13/2021 as MA based income if that was where the employee worked pre-pandemic.
MA's Covid sourcing rule applied only to MA employers.
One thing to be aware of is that California has very different rules for W-2 employees and independent contractors. If you are a California non-resident employed as a W-2 employee, you only pay CA tax for periods of time you physically work or live in California.
However, if you are an independent contractor (1099), you are required to pay California income tax for any income you earn from clients located in California, even if you never set foot in California yourself.
Thank you for your thoughtful answer. The company withholds CA tax because their policy is that CA was the initial work location per my offer letter and additionally my boss is located in SF. (I did not set foot in CA during 2021.) For those reasons, the company refuses to change the withholding to MA. Can I file a CA 540NR return asking for a total refund of all of my withholding ?
@TomD8 No, I meant CA, it's simply the reverse read of the regulations. By the way- none of this was decided definitively because SCOPUS didn't hear out the New Hampshire vs. Massachusetts case.
When an employee informs their employer they are working in another state, if the other state is a convenience rule state,
the employer is only required to withhold in the state in which it requires the employee to work.
In this case it would be California.While the person may have been a resident of MA, CA has a much higher tax rate. So there
wouldn'thave been MA withholding purely based on residency. Principally it has to do with the fact that a state cannot be both a physical presence and convenience rule state. In New York we call this the "reverse convenience rule".
As an example, if you are a NYS resident, working remotely from your home in NYS, for a CA based employer- those are CA workdays under NYS law. Doubtful there is any guidance to this point yet related to MA, but I am sure there is case law or other guidance in one of the 5 pre-existing convenience rule states.
Full disclosure- I think its more likely than not that the employer is just afraid of the CA FTB and residency concerns during the pandemic, and
that'smore likely the reason for the withholding. However, that
doesn'tmean that there
isn'ta position here that the taxes are in fact due to CA, not MA. Given CA has a four year SOL and MA a three year SOL, I'd try to get further guidance from CA FTB on how it plans to treat this. Last thing you want to do is include as MA income, the SOL closes, and then audited by CA with no recourse for a credit in MA. Just my thoughts.
@McCartF asked:
"Can I file a CA 540NR return asking for a total refund of all of my withholding?"
Yes. If you were a full-year non-resident of California, and you never physically worked within California, your W-2 income from that work is not taxable by California. If your employer in that situation mistakenly withheld CA taxes from your pay, your proper recourse would be to file a non-resident CA tax return, reporting the CA withholdings but allocating zero income to CA.
That will result in CA refunding the incorrectly withheld taxes to you.
If your state of residence during that year was MA, your income would be 100% taxable by MA regardless of your employer's location. If your employer in that situation will not withhold MA taxes for you, you must make quarterly estimated tax payments to MA in order to avoid any penalties.
Employers do not set the rules for state income taxation; the states themselves do.
Note: My answer applies only to W-2 employees. As @Opus 17 pointed out, CA's rules for independent contractors - those who receive a 1099-NEC or 1099-MISC - are different.
You were misinformed. California will tax that income.
If all your work is actually (physically) performed in your state of residency and you never physically work in any other state, then you would have NO "other state income. "Currently, the only exception to that is California. Due to a 2019 court ruling in CA, if you are a sole proprietor and you provide services to a client located in CA, that income is taxable by CA - even if you never set foot in California."
@ali21471 --
If you are a resident of CA, all your income is taxable by CA, regardless of its source.
If you're a non-resident of CA who performs services as an independent contractor for clients located in CA, then the income from those services is taxable by CA.
An independent contractor should receive a 1099-NEC from any client from whom he has received payments totaling $600 or more during the tax year.
@ali21471 wrote:
Will the answer given also apply to someone with a Green Card who lives/performs service for a CA based company as an independent contractor? Should they receive a 1099?Thank you much for your thoughts in advance!
You cut and pasted a lot of stuff, but I think this is your actual question.
The rules for California are different for independent contractors and W-2 employees.
If you are a W-2 employee, California can only tax work you perform while you are physically working or residing in California. If you are working out of state for a California employer, California can only tax you for days you work in California (such as, trips for training, meetings, etc.)
If you are an independent contractor living outside of California, California can tax you for income you earn if you perform work for a client located in California, even if you never physically set foot in the state. (California will also tax you for work you perform inside California if you travel to the state for work.) That is true for anyone performing work as a self-employed/independent contractor, it doesn't matter if you are a US citizen, green card holder, or even an undocumented non-citizen. In general, if you work for businesses, they are required to issue a 1099-NEC if they pay you more than $600. However, if you perform work for people who are private parties and not themselves running a business, they do not have to issue a 1099. Regardless, you are required to report and pay income tax on all your income from your own accurate records, even if you don't get tax paperwork. You would need to file a single federal tax return, a non-resident California return reporting only the income from California clients, and a state return for your home state reporting all your income. Your home state will give you a partial credit for the taxes you paid to California.
Sorry for the Cut and Paste - My first time posting and I was not sure if this would show under the original post.
So how does this work with the Canada/US Tax Treaty? If the contractor files a zero federal return for the US you are saying they would still file a NR return for california?
@ali21471 --
See Section K on page 10 of this California tax publication regarding foreign residents with income from California sources:
Ok - so since the contractor has income from a California source - even though the work is not performed in California, but in Canada, it is still CA Taxable. Is this how you read that?
@TomD8 Thanks for all your thoughts and time on this! Truly appreciated!
@ali21471 wrote:
@TomD8 Thanks for all your thoughts and time on this! Truly appreciated!
If you are not a US citizen or resident, you won't be able to use Turbotax to prepare the California NR return. I'm not sure how you would do that, you might need to do it by hand from the paper forms and instructions, or hire a local professional. Good luck.
@ali21471 's previous posts implied that she is a green card holder. An individual who obtains a green card is treated as a lawful permanent resident and is considered a U.S. tax resident for U.S. income tax purposes.
@TomD8 But they would be non resident if living and working in Canada (their original country), yes?
If @ali21471 has a green card, they are considered a permanent resident of the US, and are subject to ALL US tax laws, regardless of where in the world they happen to live or perform work.
If you are a U.S. citizen or green card holder living in Canada, you still have to file a Form 1040 and report your worldwide income be- cause of the “saving clause” in Article XXIX(2), which allows the United States to tax its citizens and residents as if the treaty had not entered into effect. There are limited exceptions to the saving clause, which means certain types of in- come may be exempt from tax in the United States. Exceptions to the saving clause can be found in Article XXIX, paragraph 3.
https://www.irs.gov/pub/irs-pdf/p597.pdf
That means they file a full form 1040 tax return to report and pay tax on all their world-wide income , and in this case, a California non-resident return to report and pay tax on their income from California sources, including clients. (They would also file a resident state tax return if they maintain and permanent residence or "domicile" in another US state, even if they didn't live in the US all year.). They can claim a foreign tax credit on their federal tax return if Canada taxes them on the same income, but there is nothing similar that would avert or reduce the California tax on California-sourced income.
I was a bit confused because the question "What if I live in Canada" would have a someone different answer depending on whether the taxpayer was a US resident/citizen or not.