California Nonresident Taxes Due on W-2

[G2R]

Have a client that lives and works from home in Georgia.  Never steps foot in California.  The company he's working for is based out of California and is currently withholding California state taxes for him.  From what I'm reading on their website (which is HORRIBLY insufficient), the source and taxation of the income is dependent on the client's presence in California, not he employer presence and thus they should NOT be withholding these California state taxes.  Can some please confirm this for me?

[Edsel]

If it is California-source income, he should be liable, and file a non-resident California return.  He can get credit for taxes paid to California on his Georgia resident return - up to the rate Georgia would charge him on the same income.

There have been squabbles about people working from home, and I imagine court cases.  Would like to know more about how the court cases turned out.  Problem is, these are state court cases and not from the federal system, so the decisions can be inconsistent.

[G2R]

Just got off the phone with the Employment Development Department (recommendation by the Franchise Tax Board as they did NOT know the answer to this question.)  Luckily the EDD did!  They referred me to this publication de231d:  https://www.edd.ca.gov/pdf_pub_ctr/de231d.pdf

Then she explained that since the services were not performed IN California, nor was the employee a resident of California, the employee was not liable for California state taxes and should NOT have W/H being taken out. 

Hope this helps someone else down the line!

[jklcpa]

6 minutes ago, GGRNY said:

since the services were not performed IN California, nor was the employee a resident of California, the employee was not liable for California state taxes and should NOT have W/H being taken out. 

Exactly. CA operations on a "source rule" for compensation of nonresidents. I was off looking for a good link for you and found one that I'd posted a couple of years ago. GGRNY has the answer, and for anyone else, here is the article: http://www.sangerlaw.com/Articles/NONRESIDENTSWORKINGREMOTELYFORCALIFORNIABUSINESSES.pdf

Here's another page from that law firm that has a few other articles on CA compensation issues for nonresidents too: http://www.sangerlaw.com/Articles/

 

 

[G2R]

Thank you JKLcpa -- that article is EXTREMELY clear as to how this situation works.  I've added it to my files as well.  Big time thank you for the additional information.

[BulldogTom]

GGRNY,

I agree with what the others have said.   I suspect that the payroll department of the company did not set up an employer account with Georgia, and therefore reported all the employee wages on their California tax return. (Just FYI - the Franchise Tax Board collects income taxes, the Employment Development Department collects payroll taxes, just in case you need to ever call again).  I think the employer really screwed this up, and the way to fix it is for the employer to amend their DE9 (which is the CA equivalent of the 941).  

If I am correct, and the employer will not amend the DE9, your nightmare is just beginning.   The FTB will have a record of wages earned from the employer DE9.   They are going to want a tax return.   If you don't file it, they will assess and collect via any means possible.   If you do send in a return and it does not match the wages reported on the DE9, you will get a letter and a demand for payment of taxes.   If you send them a letter in response, it will not be read.   If you want to file a power of attorney to represent, you have to sign up with the state for access to the website, and then it takes a minimum of 30 days for the FTB to approve your POA.   Then you get to make the phone call that will probably not be answered.   And if you are so lucky as to get through to a live person, they will not be helpful or courteous.   They will start by asking for bank account information on your client.

Your client needs to get with the payroll department and get this fixed before the end of the year.

Sorry to be the bearer of grim news.   I have lived and practiced in this state for too long to expect this will come out well for your client.

Tom
Modesto, CA

 

[G2R]

BulldogTom, 

 

Thank you for your valuable insight.  I really do appreciate it!  My client has already contacted their employer and has been told they are refiling the payroll returns and California taxes are no longer being withheld or reported.  Crossing my fingers that this is true and crossing my other set of fingers that come tax time, California still doesn't link my client to their arrears

[Medlin Software, Dennis]

The employer needs expert legal advice.  A larger practice may be best, since there are employment (taxation and reporting) and company issues (liability for the work location for starters) which should no longer be ignored.

The employer "opened" and "managed" a location in GA they have likely not been properly caring for.