Will I owe any California income tax?

[bcbkakljdasdas]

I currently work a job based out of New York city but work remotely out of Texas. As New York State taxes remote employees, I have to pay New York State income tax along with federal income tax. Texas does not have a state income tax.

I am thinking about spending a month later this year working remotely out of California as well and was just wondering if there will be any tax implications for doing so? Will I owe any California income tax if I do this?

[tagteam · Accepted solution]

If you are not a California resident, do not have California source income, and are not availing yourself of clients in California (e.g., not providing services to a California firm or clients), then there should be no California income tax implications.

[rjs]

However . . . When you say you will be "working remotely out of California" do you mean that you will be physically in California, working remotely for the New York company or some other remote employer? If that's what you mean, any income that you earn for work that you do in California is California source income. You do have to pay California tax on any income that you earn for work that you do in California, no matter where the employer is located or where your permanent residence is, and no matter how long or short a time you spend in California.

[Opus 17]

You don't specifically say, but are you an independent contractor or a W-2 employee?

If you are an independent contractor, the source of your income is determined (for CA purposes) by where your customers live.  If you have no CA customers, then temporarily working from CA does not subject you to CA income tax.

However, if you are a W-2 worker, the source of your income under CA tax law is determined by where you are living or working when you perform the work. See here. https://www.ftb.ca.gov/about-ftb/newsroom/covid-19/help-with-covid-19.html#Residency-and-income-sour...

Although this is a FAQ for COVID, I believe the principles are a permanent part of CA law. 

Generally, you owe income tax to the place where you perform the work.  You also owe income tax to the place where your permanent residence is located (but not if you live in TX).  In this case, you would file a non-resident return for CA to only report the portion of your income earned while living or working in CA. 

You might get away with it, if the FTB doesn't know you are there.  But the law seems to be that you owe CA income tax.

Income sourcing for nonresidents temporarily relocated to California, and filing and paying California income taxes during COVID-19

Scenario 1: You work for an out-of-state employer and receive a W-2 from them. You temporarily relocate to California. Do you need to file a California return and pay California income tax?

Answer: Yes. As a nonresident who relocates to California for any portion of the year, you will have California source income during the period of time you performed services in California. You will need to file a California Nonresident or Part-Year Resident Income Tax Return (Form 540NR) return to report the California sourced portion of your compensation. One way to calculate the portion of your income that is California sourced is to multiply your total amount of income for the year by a ratio of your total number of days performing services in California over your total number of days performing services worldwide.

[bcbkakljdasdas]

I see. Thank you for the responses. Yes that situation does apply to me so it seems like I might owe some income tax.

Say my annual gross income is $100,000 and I spent 4 of the 52 weeks in the year working in California. Will I owe California state income tax as if I only made $100,000*(4/52)=$7692.31 in the year, which would be very minimal, or will I pay a certain percentage of the tax from the total income tax I had for the year which was on a gross income of $100,000? 

[Hal_Al]

Q. Will I have to file a CA return and owe any California (CA) income tax if I work remotely in CA on a temporaray basis?

A. Yes, but "nobody" does*. See http://money.cnn.com/2013/06/28/pf/taxes/business-traveler-tax-threat/  

Even if you do decide to file a CA return, CA will give you a credit for the tax you paid to NY on the same income ($7692).

Q. Will I owe California state income tax as if I only made $100,000*(4/52)=$7692 in the year?

A. Yes. 

*If you live in a state without an income tax (e.g. FL or TX), and your employer was located there too, it’s more likely you should file in the work location state (CA). You can't use the "it all comes out even" rationale for not filing.

[Opus 17]

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@Hal_Al wrote:

Q. Will I have to file a CA return and owe any California (CA) income tax if I work remotely in CA on a temporaray basis?

A. Yes, but "nobody" does*. See http://money.cnn.com/2013/06/28/pf/taxes/business-traveler-tax-threat/  

Even if you do decide to file a CA return, CA will give you a credit for the tax you paid to NY on the same income ($7692).

Q. Will I owe California state income tax as if I only made $100,000*(4/52)=$7692 in the year?

A. Yes. 

*If you live in a state without an income tax (e.g. FL or TX), and your employer was located there too, it’s more likely you should file in the work location state (CA). You can't use the "it all comes out even" rationale for not filing.

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@Hal_Al would CA give a credit for NY taxes paid, or would NY give a credit for CA taxes paid?  Remember both returns are non-resident—do non-resident returns have credits for taxes on other non-resident returns?  Or would the taxpayer report 4 weeks of income on their CA non-resident return and 48 weeks of income on their NY non-resident return?

[Hal_Al]

@Opus 17 - Good question.  I'm not familiar with the step by step of either state.  I doubt that reporting the prorated income is an option (that's usually just for part year residents). I suspect the credit could be done either way. On the other hand, there may be no place for a credit on a non-resident return (since credits are usually given on the resident return.

[tagteam]

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@Hal_Al wrote:

.....there may be no place for a credit on a non-resident return (since credits are usually given on the resident return.

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That is entirely possible (perhaps even probable in this instance - two NR returns).

However, with respect to a NR CA return, is there not an income threshold for filing?

[Hal_Al]

I interpret the CA income filing requirement to be based on total income, not just your CA source income (https://www.ftb.ca.gov/file/personal/residency-status/part-year-and-nonresident.html), even though only your CA income gets taxed.  This is the general rule in most states.

[tagteam]

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@Hal_Al wrote:
This is the general rule in most states.

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I agree. There are a few states that allow a personal exemption (even for nonresidents), but the taxpayer's source income here has almost certainly exceeded any exemption (assuming one is even available).

[TomD8]

Just to throw a small wrench into the proceedings, if you're a nonresident of New York, and you never physically work within the state of New York, not even for a single day, then your remote income is not subject to NY income tax.

See paragraph 64, https://casetext.com/case/hayes-v-state-tax-comm

Any income you earn from work actually (physically) performed from a California location is taxable by California.  This is true regardless of your employer's location, regardless of whether you are an independent contractor or a W-2 employee, and regardless of whether or not you are a resident of CA.

The income of a CA non-resident independent contractor working from a location outside CA is taxable by CA only if the services are provided to a CA-based client.

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

[bcbkakljdasdas]

Thank you for the responses. 

Regarding New York state taxes, yes, I will not be physically working in New York state for even a single day in the year. But I believe New York state and a few other states have something known as the "Convenience of the Employer" rule that basically says if you are working outside the state of New York for your own convenience, you are still subject to New York state income taxes.

https://smartasset.com/taxes/convenience-of-the-employer-rule#:~:text=The%20convenience%20of%20the%2....

Am I missing something here? Should I bring up to my employer to no longer withhold New York state income taxes or is that being correctly withheld?

[Opus 17]

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@bcbkakljdasdas wrote:

Thank you for the responses. 

Regarding New York state taxes, yes I will not be physically working in New York state for even a single day in the year. But I believe New York state and a few other states have something known as the "Convenience of the Employer" rule that basically says if you are working outside the state of New York for your own convenience, you are still subject to New York state income taxes.

https://smartasset.com/taxes/convenience-of-the-employer-rule#:~:text=The%20convenience%20of%20the%2....

Am I missing something here? Should I bring up to my employer to no longer withhold New York state income taxes or is that being correctly withheld?

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I have always read the rule the way you do.  @TomD8 has a different point of view, and I have not had time to analyze it thoroughly.  You might want to consult a CPA (perhaps one in NY) because if Tom is right, you could file amended returns and get several years of taxes back.

If I understand correctly, a distinction is drawn between someone who works occasionally in NY but mostly remotely, and someone who never sets foot in NY.  I think Tom's argument is that if you never set foot in NY, they can't tax you, but if you work in NY a little bit (say, 1 day a month for in-person meetings, or 1 week per year for training, and so on) then NY can tax all your income under the convenience rule.

I would like to analyze this further but I don't have time right now.  There is the 2006 TSB, and then there may be court cases that refine or set limits on the convenience rule.  You may want to engage a professional with knowledge of the rule. 

[tagteam]

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@bcbkakljdasdas wrote:

Am I missing something here? 

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The exception to the general rule, as @TomD8 pointed out in his post.

See https://www.cpajournal.com/2022/04/01/working-from-home