I am currently living in VA and working remotely for a company whose base is CA. I am wondering whether I will be taxed by these two states?
I noticed on this website (https://www.tax.virginia.gov/credit-for-taxes-paid-to-another-state), it says
- If you have income from Arizona, California, or Oregon sources, you can't claim a credit for taxes paid to those states on your Virginia income tax return. Claim a credit on the nonresident income tax return for the appropriate state.
- If you are an owner or member of a pass-through entity with income from any of these states and you participate in the filing of a composite return, please consult Public Document 16-91.
What does this mean? Does this mean I could not get a credit for VA, but I can get a credit for CA? or I could get neither? Could anyone translate this? Thanks a lot!
as a nonresident who never sets foot in California to perform his services, the source rule works in the nonresident’s favor, even if the employer is California based. the income sourcing is determined by the location where the employee services are actually performed, not the location of the employer. A nonresident programmer who monitors and upgrades satellite dish software for a California based company, all while sitting comfortably in front of his computer somewhere in VA, doesn’t earn California-source income and doesn’t have to pay California income taxes, as long as the work is performed outside of California.
At the employer end, while California companies have to withhold state payroll taxes for resident employees wherever they perform their services, and for nonresident employees for services in-state, this is not the case for nonresident employees who perform services outside of California.
the above assumes the nonresident is an employee, and not an independent contractor. For nonresident independent contractors, different rules apply. Specifically, the issue is in what state the benefit was received. Accordingly, even if the independent contractor never sets foot in California, if he is performing services for a California-based customer, he has an economic nexus with the state and is likely doing business in California for income tax purposes. That determination falls under a totally different set of stringent, often complex rules, which typically result in the net revenue from a sale of products or services to a California customer being subject to California income taxes.
This often comes as a shock to nonresident independent contractors who thought the “never set foot” defense applies to them. It doesn’t. It only applies to employees. Moreover, the status of the vendor as independent contractor matters not only to nonresident sole proprietors, but any out-of-state business entity with sales to California customers. For more details about the economic nexus rules for independent contractors, see “Internet-Based Companies and ‘Doing Business’ in California: Be Careful What Your Website Says About You.” https://www.palmspringstaxandtrustlawyers.com/internet-based-companies-business-california-careful-w...
The income of a VA resident is 100% taxable by VA, regardless of its source.
If you are a W-2 employee of CA company, but you never live in nor physically work in CA, your income is not taxable by CA.
If you are a non-resident of CA and an independent contractor (your earnings are reported on a 1099-NEC or 1099-MISC instead of a W-2), and you provide services to a client based in CA. those earnings would be taxable by CA. But you'd be able to take a credit on your CA return for the taxes paid to VA on that portion of your income.
"At the employer end, while California companies have to withhold state payroll taxes for resident employees wherever they perform their services, and for nonresident employees for services in-state, this is not the case for nonresident employees who perform services outside of California. "
Thanks for your prompt reply. I did not understand this claim. Could you kindly illustrate it more? Does this mean the employer will not withhold CA state payroll taxes as I am working in VA? I am an employee, not
an independent contractor. I am sure that the company will only go with CA state payroll to pay me, and the company will not use VA state payroll to pay me, as I am probably the only employee working remotely in VA. Thanks a lot for your help.
Thanks for your reply.
I am confused about this claim "if you are a W-2 employee of CA company, but you never live in nor physically work in CA, your income is not taxable by CA.". My company will withhold the tax in the W-2. Then what I should do? Thanks a lot.
If you're a W-2 employee, a non-resident of California, and you do not and will not physically work in California, then ask your company to cease withholding California income tax. Your earnings are not subject to taxation by CA.
If your employer does withhold CA income tax despite your request, at year's end you'll have to file a non-resident CA tax return on which you allocate zero income to CA. CA will then refund the incorrectly withheld taxes.
If your employer cannot or will not withhold VA income taxes for you, you should begin making quarterly estimated tax payments to VA. This reference explains the process: