California or Indiana?

[gdw3music]

I have worked all 2022 for a university in Los Angeles while living in Indiana. I was already employed with them before we moved to Indiana in December 2021. Will I be paying California or Indiana state tax for the tax year of 2022?

[TaxandtheCurious]

I am assuming from your question that you have lived in Indiana for all of 2022 while working for a CA employer. If this the case, you would be classified as a nonresident for CA purposes. You would be required to file a NonResident CA return (Form 540NR), as work done remotely for CA employer is considered CA source income and subject to CA tax (State of California Franchise Tax Board). CA taxes on all Income from California sources, even while you are a nonresident.

For additional info you can refer to FTB website: https://www.ftb.ca.gov/file/personal/residency-status/part-year-and-nonresident.html 

[gdw3music]

Thanks. So I’m not paying any Indiana state income tax? (Assuming no other income)

[TaxandtheCurious]

You will file an Indiana Resident return and a CA non-resident return. The general rule is: your report ALL your income on your home state return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. You do not necessarily get out of paying income taxes to your home by working in another state.  Tax treatment of out-of-state income depends upon the type of income and the state from which the income is derived. the state of Indiana has entered into reciprocity agreements with several other states (Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin) to eliminate the requirement to pay taxes to two states on the same income. Unfortunately, CA is not one of the reciprocal states. However, starting in 2017, Indiana residents included in a California composite return will receive a credit equal to the Indiana income tax rate multiplied by the income taxed by both Indiana and California, reducing the effective state tax rate on their California source income to 9%.

To clarify: 

Since the state you work from, CA does not have a reciprocal agreement with your home state of Indiana, you’ll have to file a resident tax return and a nonresident tax return. 

• On your resident tax return (Indiana), you list all sources of income, including that which you earned out-of-state. 

• On your nonresident tax return (CA), you only list the income that you made in that state. 

In some cases, your home state will allow you to claim a tax credit on your resident tax form for the taxes that you paid to your work state. So, you will want to prepare your nonresident return first.

[gdw3music]

Thank you very much for that detailed reply!

[Dhammer1]

As an employer, if you have an employee that is a resident in Indiana but works in CA. Should you withhold Indiana state income taxes? 

[ErnieS0 · Accepted solution]

Yes. California requires an employer to withhold tax on a nonresident who is physically working in California.

California Revenue and Taxation Code (R&TC) Section 18662 and the related regulations require withholding of California income or franchise taxes from payments and distributions made to nonresidents on California source income.

R&TC Section 17951 contains the provision requiring nonresidents to be taxed on all income from California sources. California source income includes payments for personal services performed in California. Where the nonresident lives, the location where the contract for services is entered into, or the place of payment does not determine the source of income from personal services. The location where the personal services are performed determines the source of income. Nonresidents must include in California gross income the gross payments for all services performed in California.

See Resident and Nonresident Withholding Guidelines

@Dhammer1