temporary employment

Nonresidents Working Temporarily in California

Published on: December 2, 2024 | 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, in some cases. 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. Top executives tasked with setting up a new branch for their business in the state may also find themselves in this situation.

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 or 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, with the result that all their taxable income from any source may be subject to California taxation. To control that, nonresidents working in California should have a plan.

Why It Matters?

At first blush, it might not seem to matter much whether a nonresident working on a temporary basis in California is deemed a resident or not. The W-2 wages (for employees) or 1099 payments (for independent contractors) received while working on a project in California are usually taxable by California regardless of residency status. Where W-2 salary is involved, it’s all but inescapable because the work is performed in California, and California imposes an income tax on compensation for work discharged while physically present in the state. In the case of 1099 income, if the work is in California, that usually means the customer is also located 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. See this article on the sourcing of W-2 compensation vs. independent contractor payments under California law.

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% (14.4% if the income is W-2 sourced to California). Continue reading

Moving to California After a Liquidity Event: A New FTB Case Highlights All the Mistakes Nonresidents Can Make

Published on: January 15, 2023 | by Chris Manes

The Case

A recent case from California’s Office of Tax Appeals brings some clarity to how strictly California dates a change of residency for income tax purposes when a nonresident claims to have moved to California shortly after a liquidity event. The case, Appeal of Housman, OTA Case No. 18010200 (November 2022), in some ways is the flipside of Appeal of J. Bracamonte, a case involving a resident who claimed to move to another state shortly after a stock sale. Bracamonte is discussed in detail in this article. Both cases went badly for the taxpayers, and for many of the same reasons: failure to plan, failure to keep residency related records, establishing or retaining superior living accommodations in California, spending more time in the state than in their home jurisdiction during the year at issue.

Overview: The Importance of Timing

As discussed in the Bracamonte article, changing residency from California is binary: it happens on a specific date. Indeed, the date has to be reported on Schedule CA of the 540NR “part-year” return, which exiting taxpayers, with few exceptions, have to file for the year they move. The converse is also true for nonresidents moving to California. Schedule CA of the part-year return requires those taxpayers to disclose the date they become California residents. Continue reading

Five (More) Internet Myths About California Residency Rules

Published on: June 24, 2019 | by Chris Manes

Is Bigfoot a California Resident?

Manes Law discussed its top five internet myths about California tax residency rules in a previous article. Here are five more. Again, they’re in no particular order, but the commentary should provide some indication about how important they are and why.

Myth #1: Leave California, Sell Your Business, And You’re Home Free

Many of our clients are founders exiting startups, either through an IPO or purchase by another company. Or they are long-term business owners in traditional industries who plan to sell their California-based company after retiring out of state. The widespread internet meme insists these scenarios always result in zero California income tax on the gain, even though the sale is of a California business.

The basic concept is correct: if a nonresident sells his interest in a California business (that is, corporate shares, limited liability company memberships, partnership interests), the traditional rule is California can’t tax the gain. But not so fast. Numerous factors play a role in determining whether a business sale by a nonresident will escape California’s tax system.

The first is, the transaction must in fact be the sale of a business interest, not the sale of business assets. For good tax reasons, purchasers often prefer to buy assets, not business interests, if the value in the company is in the assets, not the brand. And in some industries, an asset sale is the standard for a business purchase. But take note: if the assets are situated in California, an asset sale by a nonresident results in California-source income, taxable by California regardless of the residency status of the seller. Generally, only interest sales are eligible for tax-free treatment by California when the owner is a nonresident. Continue reading