Many workers who are not residents of California earn income from California sources. For instance, many remote employees do not live in California but work for companies based within the state. Furthermore, many independent contractors from other states provide services to businesses in California.
If you are not a California resident but have income from California sources, then you are subject to California income tax on that portion of your earnings where services were rendered from California. When calculating the California taxable portion of your California-sourced income, you must determine the ratio of days worked in California to total working days from both outside California and from within California.
For example, if you attended in person meeting in California for 30 days of a particular tax year and worked a total of 300 days via telecommuting including the 30 days you spent in California, you would be taxable on 10% of your total wages earned in that tax year for California purposes. You would only get credit for whatever California withholdings were paid in by your employer.
It will be extremely helpful if your employer is willing to reflect this allocation by issuing two W2’s per Calendar tax year. One for the total wages sourced to California along with the appropriate withholding and one for your state of residence with the appropriate withholding. If your employer apportions all your income to California where you rendered services entirely from outside California via telecommuting, you will likely face California enforcement action if you do not report this income as California source income and pay taxes on it via a timely filed California form 540. This is especially true where California receives a refund claim for substantially all of the related California withholding via nonresident form 540, (540NR). The law and facts may still be on your side, but this is California we are talking about. There exists way to much rubber stamping of California auditor positions within the California appeals & litigation process in my opinion.
If the state you live in taxes worldwide income and thus both W2’s are taxed, you may qualify for a California credit for income taxes paid to another state when the same income that is taxed by the other state is also taxed by California. Other state income taxes which are paid to the other state do not necessarily have to be in the same calendar year, as long as the taxes relate to the same set of transactions.
Support from our CPAs & Tax Attorneys can be immensely valuable during this process. We will help you avoid potentially serious California tax issues. Get help from our Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 or clicking here to schedule a reduced rate initial consultation.
Paying Taxes on Income Earned in California
As previously discussed, nonresidents of California are indeed subject to California income tax on income earned within the state. Cal. Code Regs. Tit. 18, § 17951-1(a) specifies that nonresidents are taxable only on income derived from California sources. This may include income earned through remote work for a California employer or through occasional business activities conducted within California.
Cal. Code Regs. Tit. 18, § 17951-5(b) sets forth the framework for determining the proper allocation of California-sourced income for a salaried wage earner that is employed in this state at intervals throughout the year. In this scenario, the taxpayer’s California-sourced income is determined by the ratio of days worked in California to total working days.
This allocation method has been corroborated by the California Franchise Tax Board (FTB). Their official website clearly states, “one way to calculate the portion of your income that is California sourced is to multiply your total amount of income for the year by a ratio of your total number of days performing services in California over your total number of days performing services worldwide.” In other words, one would perform the following formula:
CA Workdays / Total Workdays = % Ratio
% Ratio x Total Income = CA Sourced Income
If you are a nonresident of California who earns income from California sources, then your income must be properly allocated. Fortunately, our Dual-Licensed Tax Lawyers & CPAs can assess your situation to ensure that you are acting in compliance with California law. That way, you may avoid serious issues with your filings.
Implications of Employer Misallocation of Wages to California
Suppose your employer mistakenly withholds income tax and allocates more wages to California than they should have. In that case, the FTB will likely consider your employer’s allocation presumptively correct during an administrative action, such as an audit. This means that the burden of proof falls on you, the employee, to demonstrate that your employer’s allocation was in error. This can be particularly challenging, especially if the other state involved does not have an income tax like Florida or Texas.
As a result, it’s crucial to proactively address any discrepancies with your employer and maintain thorough records to substantiate your case in the event of a California tax audit. Our legal professionals will provide valuable guidance and assistance in navigating these complex tax matters. Furthermore, we will work diligently to protect your interests. If we take a position for you on a tax return, we will defend it on an hourly basis if challenged.
Potential Consequences for Failing to Pay California Income Taxes
The repercussions for failing to pay California income taxes on California-sourced income can vary depending on the circumstances of the case at issue. The following are some examples of consequences that may be associated with such misconduct:
Penalties and Interest Accrual
Failing to pay California income tax on earnings derived from California sources can lead to the imposition of penalties and interest by the California Franchise Tax Board (FTB). Penalties may include late payment penalties, which are typically a percentage of the unpaid tax amount, and failure-to-file penalties if a tax return is not submitted on time. Additionally, interest accrues on any unpaid tax amount from the original due date of the return until the tax is paid in full.
Audits and Assessments
The FTB may conduct audits to review taxpayers’ compliance with California tax laws, especially in cases where income allocation between states is complex or disputed. If the FTB determines that California income tax should have been paid on earnings derived from California sources but was not, they may assess additional taxes, penalties, and interest retroactively. Audits can be time-consuming, costly, and may result in significant financial liabilities if discrepancies are found.
Legal Action and Collection Efforts
Persistent failure to pay California income tax on California-sourced earnings can escalate to legal action by the FTB to collect unpaid taxes. This may involve filing tax liens against the taxpayer’s assets, garnishing wages, or seizing bank accounts or other assets to satisfy the outstanding tax debt. Legal proceedings can result in further financial strain, damage to creditworthiness, and potential loss of assets if not resolved promptly.
Loss of Tax Credits and Benefits
Nonpayment of California income tax on California-sourced earnings may also result in the loss of certain tax credits or benefits that taxpayers may otherwise be entitled to. For example, failure to file a California tax return and pay the appropriate taxes could result in the forfeiture of eligibility for the California Earned Income Tax Credit (CalEITC) or other state tax credits, reducing potential refunds or tax benefits available to the taxpayer.
Reputation and Compliance Risks
Lastly, beyond the immediate financial consequences, failing to pay California income tax on California-sourced earnings can damage a taxpayer’s reputation and compliance record with tax authorities. This could lead to increased scrutiny in future tax filings, audits, or interactions with tax authorities, potentially resulting in heightened penalties, interest, and legal consequences. Maintaining compliance with California tax laws is essential for preserving financial stability, reputation, and long-term tax compliance.
Call Our Law Firm for Help Resolving Your Tax Issues
Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
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