taxing nonresidents

Nonresidents Working Temporarily in California

Published on: December 21, 2018 | by Chris Manes

What’s Happening?

The digital economy has allowed increasing numbers of nonresidents to work remotely for California firms without becoming California residents, and even without paying California income taxes (see my article Nonresidents Working Remotely for California Businesses ). At the same time, more and more nonresidents find themselves being offered lucrative temporary employment in California. This is particularly true for software developers or other information technology and e-commerce specialists who are in high demand by California’s thriving internet firms to complete a particular project. But it’s also true for medical professionals, management strategists, actors, professional athletes, artists, corporate trainers, even part-time teachers in a specialty field.

What all these professionals have in common is project work. The employment in California is temporary in that it involves completing a particular project or term of service. It isn’t permanent. It isn’t open-ended. Of course, temporary is a relative term. Some projects may only last a few months; others may require more than a year to complete. The issue confronting nonresidents working temporarily in California is whether they will be taxed only on their California-source income or become a resident in the eyes of California’s tax enforcement authority, the Franchise Tax Board. To control that, nonresidents working in California should have a plan.

Why It Matters?

At first blush, it might not seem to matter whether a nonresident working on a temporary basis in California is deemed a resident or not. The wages or 1099 (independent contractor) income received while working in California is usually taxable by California regardless of residency status. That’s inescapable because the work is performed in California in the case of W-2 salary. In the case of 1099 income, if the work is in California, that usually means the customer is in the state (the FTB uses “where the benefit is received” for sourcing independent contractor revenue). Accordingly, if all the income the worker receives during that tax year comes from the project, it won’t usually make any difference what his residency status is.

However, if the taxpayer has other sources of income, it can make a big difference. California only taxes nonresidents on income sourced to California. But it imposes an income tax on residents with respect to all their income, from whatever source. And the top rate is 13.3% (14.3% if the income is W-2 sourced to California). Continue reading

Leaving California, But Coming Back to Work: Income Tax Traps After Changing Residency

Published on: June 12, 2018 | by Chris Manes

It’s no trick to leave California to avoid its high income taxes – if that’s all you want to do. You can sell all your California assets, including your home, terminate all business contacts, never spend any time in the state after your move, close all your financial accounts, sever all your professional and social connections. And so forth. Taxpayers who leave California lock, stock, and barrel don’t really have to worry about residency issues (despite scary stories on the internet). But in fact, most people who change their legal residency from California have something else in mind. They also want to or have to retain contacts with the state. That might mean a vacation home or income properties; it might be managing a California business remotely, with operations in the state; it might involve working while in California, from meeting potential clients or investors to working at a branch of an employer for designated periods. The last situation, which is fairly common, requires planning, since changing residency may not be enough to avoid California income taxes if your work for an out-of-state or in-state employer brings you back to California.

When Changing Residency Isn’t Enough

A typical situation involves a business owner who changes legal residency and moves the business out of state. But it can also involve an executive who moves out of state, but still has to make business trips to California, because that’s where the company’s client base or operations are located. Well and good. Unless a taxpayer changes legal residency, everything else is moot from a tax perspective. But the fact is California is an economic powerhouse. Few businesses, especially those in high-tech and financial services, can succeed without participating in the California market. And that often means meeting with and cultivating potential clients or investors in Los Angeles or Silicon Valley, where the capital, expertise and demand resides, or spending time working at a California branch of the company.

If that’s the case, it’s important to understand the differences between personal residency versus doing business in California versus working while physically present in California. These are three separate tax circumstances, which require different approaches to manage. Continue reading

“Request for Tax Return” Time for Nonresidents: How Not to Make that Mistake Again

Published on: April 28, 2018 | by Chris Manes

With Tax Day having come and gone, the Franchise Tax Board, California’s tax authority, is now busy sending out its annual 4600 Notices, also known as “Request for Tax Return” letters. Almost all 4600 Notices are sent to nonresidents, mostly those who own a vacation home or have a business interest in California, and have made one of several common mistakes. For a full discussion of what a 4600 Notice is, see “They’re Back: FTB 4600 Notices Coming Soon to You.”

If you receive a 4600 Notice, the first order of business is to timely and effectively respond. Whether that means filing a nonresident tax return (a Form 540NR) or providing a proper legal explanation for why you don’t have to, depends on the circumstances. Second, assuming the notice gets resolved favorably, the next task is preventing the same problem from recurring in future years.

Automatic vs “Reviewed” Triggers

4600 Notices don’t just happen. They are triggered. The trigger is usually one of several common, avoidable mistakes by nonresidents.

In my practice, the typical 4600 Notice involves a nonresident who owns a vacation home in California with a mortgage. Out of convenience or just as an oversight, the nonresident tells the mortgage lender to send the Form 1098 Mortgage Interest Statement to the vacation home. Form 1098 is the “information return” mortgage lenders generate to report loan interest. They send one copy to the FTB and another to the borrower. If the “Payer/Borrower” address on the 1098 is in California, and the borrower doesn’t file a state tax return, the FTB will automatically send a 4600 Notice. Continue reading

Happy Halloween for Nonresidents: It’s 4600 Notice Time Again

Published on: October 26, 2017 | by Chris Manes

California’s Franchise Tax Board (FTB) sends out 4600 Notices “Request for Tax Return” when it gets a tax “information return” with a California address on it, but the taxpayer doesn’t file a California return, either as a resident (a Form 540) or as a nonresident (a Form 540NR). An “information return” are documents like a 1098, 1099, K-1 or W2. There are other reasons, but this is a major one.

To give a common example, if a nonresident owns a vacation home in California with a mortgage, and he told the lender to send the Form 1098 mortgage interest form to his vacation home address, he has likely just earned a 4600 Notice. That’s because the FTB will see a 1098 with a local address associated with a person who hasn’t filed a California tax return.

This is a common mistake. It also happens with Form 1099-INT involving bank interest from a local bank account (often involving de minimis amounts), or payments from brokerage accounts or out-of-state pensions. The lesson is, nonresidents should never use a California address (whether it’s a vacation home or a relative’s place) for any tax information document.