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IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

I'm in a bit of a weird tax situation, at the beginning of the year until just recently, I (from a tax point of view) did the following:

 

* Every weekday I would (virtually) fly from Minnesota to my office in California where I worked (not a real flight, but from my company's tax records this is how it was being withheld/reported)

* At the end of each day I'd (virtually) fly back to my home in MN.

* I'm a resident of MN and still owe MN taxes for the time I was working in CA as MN taxes out-of-state income, subjecting me to double-taxation for this period.

 

I owed taxes to both CA and MN during this time, as CA viewed me as physically working there (and taxes were withheld to CA), but I was underwithheld for Minnesota as my company wasn't withholding there (so will likely owe a significant penalty to MN)

 

Now, they corrected my withholding, so from a tax standpoint I:

* Stopped working in CA

* Am now working and living in MN

* Am a resident of MN

* Do I still owe taxes to CA for this period through the end of the tax year? Or do I only owe taxes to MN now?

 

To further complicate things, my company has RSUs (restricted stock units) which are taxable at vesting time in the state of CA.

15 Replies
TomD8
Level 15

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

If you are a Minnesota resident, and you never actually (physically) worked in California, then your W2 wages or salary are not subject to California taxation.

 

As a Minnesota resident, ALL your income is taxable by your home state of Minnesota, regardless of its source.

 

If California taxes were inappropriately withheld from your pay, at year's end you'll have to file a non-resident CA tax return, on which you allocate zero income to CA, in order to get those taxes refunded.

 

CA can only tax a non-resident's W-2 income if it was earned from work actually (physically) performed inside California.

 

From CA Publication 1031, page 6:  

"Wages and salaries have a source where the services
are performed. Neither the location of the employer,
where the payment is issued, nor your location when
you receive payment affect the source of this income. "

https://www.ftb.ca.gov/forms/2020/2020-1031-publication.pdf

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

California considers me as being physically present though, due to how my employer reported my taxes, but MN also considers me to have been physically present, as if I was physically taking a plane from MN to CA and back each day.

IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

Basically, per your post

"Wages and salaries have a source where the services
are performed. Neither the location of the employer,
where the payment is issued, nor your location when
you receive payment affect the source of this income. "

 

I was physically present in CA and performed the work while in CA according to California law, but at the end of the day returned to MN where my residence is.

TomD8
Level 15

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

Your employer "considered" you to be physically present in CA, but in fact you never were - according to your original post.  Therefore your W2 income is not subject to CA income tax per California law.  That's why your employer corrected your withholding in mid-year.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

How do CA tax auditors verify where work was physically performed? Isn't it done by cross-checking the records that the employer provides to the state? I'm guessing they'd take my employer's word over my own due to the huge amount of size and influence my employer has in CA (and sheer number of employees).

TomD8
Level 15

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

I can't speak to CA's audit methods.  I can only inform you of the tax laws relating to your situation.  Perhaps your employer can correct things before they issue your W-2?

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

Ah -- so you can explain what the laws are, but not how a California court or tax auditor would interpret them?

Critter-3
Level 15

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

Sorry ... this is a public internet forum where we can refer to tax laws but cannot give legal or binding advice.  If you want more than the base info given here then ask a CA tax attorney for a legal opinion  or ask your employer for supporting references for how they do this business of "virtually" considering you a an employee working in CA ... seems weird.  

IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

I believe the argument here is that I'm "telecommuting" to CA and accessing an in-office at my desk workstation remotely, hence the work is being physically conducted from CA. I looked for case law on telecommuting as a basis for physical presence and wasn't able to find anything. This seems to be a relatively new legal issue which hasn't yet been tested in court, although I'd prefer to not be the first person to test this in court.

Critter-3
Level 15

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

Once again ... if you are not physically present in CA then as a W-2 you don't owe CA taxes ... as of now CA doesn't tax remote workers  but your employer should be able to give you more information on this unusual situation since they are using something to justify having CA withholding. 

https://www.palmspringstaxandtrustlawyers.com/nonresidents-working-remotely-for-california-businesse...

TomD8
Level 15

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

CA can only tax a non-resident on "California source" income.   Here's a link to the California statute that defines "California source" income as it applies to a non-resident:

https://www.law.cornell.edu/regulations/california/18-CCR-Sec-17951-2

 

Note the wording "performed within this state".

 

I suspect that your employer corrected your withholding in mid-year so as to be in compliance with this statute.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

It was updated after I signed a new employment agreement for "permanent remote work", the previous arrangement was temporary and because of the temporary nature the income was taxed in CA.

Critter-3
Level 15

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

Ok ... so you have had the answer all along ... not sure how that temp contract could have been allowed for CA tax purposes legally.  Sounds like the contract is  trying to over ride state tax laws.  Seek  assistance with this from a preparer or attorney in CA  or again talk to the employer if you really want to fight this.  

IDWMaster
Returning Member

Minnesota resident working in California for most of the year, employer withheld and reported to CA until just recently

My question was:

* Do I still owe taxes to CA for this period through the end of the tax year? Or do I only owe taxes to MN now?

 

which still isn't answered. It's unclear whether or not I still owe taxes for the MN period (where I'm legally considered a MN employee), or if that change in contract only takes effect at the end of the tax year, and I still owe taxes to CA for the remainder of the period. If I don't owe taxes for the current period after my new employment agreement took effect, how do I calculate how much taxes are paid to CA vs MN, as the employment agreement transition took effect in the middle of a pay cycle, so my payroll stubs don't show a clear transition here.

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