Do I have to file a state tax return in CA - Live in Minnesota working remotely as an independent contractor for company in California

[Joe188]

I live in Minnesota.  In 2022, I worked as an independent contractor for a company in California. I received a 1099-nec. I did all of the work remotely in Minnesota and never visited California. I made the majority of my income from this company. I paid estimated taxes to the IRS and the state of Mn during the year. Do I need to file state taxes in California and if so, how do I go about it? Do I just fill out a CA state tax return in Turbotax for the income I earned there?  And if so, can I get a tax credit on my state taxes in Mn for the taxes I pay to CA?  Thank you in advance for any help you can offer!

[TomD8 · Accepted solution]

You have to file in CA.  Due to a 2019 court decision, CA now taxes non-resident independent contractors who perform services for clients located in California.

https://ota.ca.gov/wp-content/uploads/sites/54/2019/08/18032402_Bindley_Decision_OTA_053019.pdf

In the Personal Info section of TT, indicate that you had other state income from CA.  This will prompt the program to generate a non-resident CA return.

You'll be able to claim a credit on your MN tax return for the taxes paid to CA, so you won't be double-taxed.

In TurboTax, be sure to complete the non-resident CA return before you do your home state MN return, so that the program can calculate and apply the credit.

ALL your income is taxable by your resident state of MN, including the CA earnings.

[Joe188]

Thank you for your reply and your help TomD8!

I have a few follow up questions for you:

1. Should I have been paying estimated taxes to California instead of Minnesota last year then?

2. If California's state Tax rate is higher than Minnesota's will I end up paying more or will the Minnesota tax credit cover all of it?

3. And doesn't Minnesota have anything to say about not getting that tax income? Why do they allow that? Or is it law?

Thank you so  much for your help! I really appreciate it.

[TomD8 · Accepted solution]

To answer your questions:

1)  Yes, possibly.  Here is CA's rule:

Generally, you must make estimated tax payments if in 2022 you expect to owe at least:

• $500
• $250 if married/RDP filing separately

And, you expect your withholding and credits to be less than the smaller of one of the following:

• 90% of the current year’s tax
• 100% of the prior year’s tax (including alternative minimum tax)

https://www.ftb.ca.gov/pay/estimated-tax-payments.html

2.  The credit is taken on your MN return and will reduce your MN taxes due.  But the credit can't exceed your MN taxes due.

3.  This is all determined by the tax laws of the two states.  The "other state credit" is necessary because federal law prevents two states from taxing the same income.

[Joe188]

Ah, I see.  I will do the taxes as you suggest and see what happens.

It sounds like I will have to pay in to CA and get a refund from MN, since I payed estimated taxes to wrong state. Does that sound right?