October 8, 2020
New California law allows certain nonresident aliens to elect to file group returns instead of individual returns
On September 18, 2020, Governor Gavin Newsom signed into law AB 2660 (2020 Cal. Stats., ch. 102), allowing nonresident aliens who are not eligible for, or have not been issued, a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN) to elect to file a group return instead of an individual return for taxable income received for services that take place in California. As a result, the nonresident alien can make the election without having to provide an SSN or ITIN.
For tax years beginning on or after January 1, 2021 until January 1, 2026, AB 2660 requires the California Franchise Tax Board (FTB) to allow nonresident aliens who receive California-source income the option of electing to file a group return in lieu of an individual return. The election also can be made by an entity authorized by the taxpayer to file on his or her behalf. The tax rate for each nonresident alien making the election will be the highest marginal individual income tax rate(s). If the electing nonresident alien would be subject to the mental health tax 1 when filing individually, an additional 1% tax rate will apply. Further, a nonresident alien making the election to join in a group return will not be allowed any deductions or credits, except for taxes withheld under the California State Unemployment Insurance Code.
The nonresident alien taxpayer, or an entity authorized by the taxpayer to file on his or her behalf, is responsible for making the requisite payments of tax, interest and penalties. In addition, tax payments made by an entity authorized by nonresident alien taxpayers to file on their behalf would be excluded from the nonresident's income.
AB 2660 also allows the FTB to adjust the income of an electing nonresident alien taxpayer included in a group return to properly reflect income.
Effective for tax years beginning on or after January 1, 2021 until January 1, 2026, AB 2660 prohibits the FTB from requiring a nonresident alien to provide an SSN or ITIN when filing a state tax return, statement or other document if the nonresident alien is not eligible or has not been issued such numbers. If a nonresident alien later becomes eligible for and is issued an SSN or ITIN, the FTB may require the nonresident alien to document the number.
According to the bill's analysis, the new law will give an international company the option of filing a group return on behalf of its foreign employees who travel to California for work. AB 2660 also eases the administrative burden on nonresident alien employees who would otherwise have to file an individual income tax return to report the associated wage income. Although the income earned by electing nonresident aliens in the group return will be subject to the top marginal tax rate in California (and the 1% mental health tax, if applicable), tax savings may be available to employers operating tax equalized programs and paying the California state tax on behalf of their employees, as the employer does not need to consider the tax payment made as additional employment income to that individual.
1 The mental health tax is a 1% tax imposed on personal income over $1 million per year that goes to California's county mental health service systems. California Mental Health Services Act (as of Jan. 27, 2020), Sec. 12 (the California personal income tax provisions of which are codified at Cal. Rev. & Tax Code §17043).