October 29, 2020
California issues guidance concerning the nonresident income tax implications when employees work temporarily in the state due to COVID-19
The California Franchise Tax Board (FTB) included in its COVID-19 frequently asked questions (FAQs) information concerning residency and the income tax implications for nonresident individuals working within the state temporarily due to the virus.
The FTB explains the liability for California nonresident income tax based in the following scenarios.
Scenario 1: Employees work for an employer outside of California and receive a Form W-2 from that employer. They temporarily relocate to California for telework due to COVID-19.
As nonresidents who relocates to California for any portion of the year, the employees have California-source income during the period they performed services in California. Accordingly, they will need to file the California Nonresident or Part-Year Resident Income Tax Return (Form 540NR) to report the California-sourced portion of their compensation.
The FTB explains that one way to calculate the portion of income that is California-sourced is to multiply the total amount of the employee's income for the year by a ratio of their total number of days performing services in California over the total number of days they performed services worldwide.
Scenario 2: Employees work for a California employer and receive a Form W-2 from that employer. They temporarily relocate to California for telework due to COVID-19.
These employees are required to file California personal income tax returns if they performed services in California for wages. Where an employee performs services (not the location of the employer) determines how they file their California taxes. See Scenario 1.
Scenario 3: Independent contractors relocate temporarily to California and they have not had previous source income from California.
If nonresident independent contractors' income was not previously considered California-sourced, they would not create California-source income simply by relocating temporarily to California. However, if a customer in California receives the benefit of their services in California, they will need to file a California personal income tax return.
California-source income for independent contractors is determined by looking to where the benefit of the service is received. The location where the independent contractor performs the work is not a factor.
Ernst & Young LLP insights
See EY Tax Alert2020-2242 for guidance issued by the FTB concerning nexus guidance for out-of-state corporations that previously had no connections with California but now have employees indefinitely teleworking in California under Governor Gavin Newsom's stay-at-home order.
See also EY Tax Alert 2020-2544 for guidance issued by the California Development Department concerning the obligation to pay state unemployment insurance tax, state disability insurance tax and the employment training tax for nonresidents working in the state temporarily due to COVID-19.
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