Articles Tagged with taxing nonresidents

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keep-calm-and-happy-6-months-257x300You don’t have to be a tax lawyer to know that the way to avoid becoming a resident of California is to spend less than six months here.  Right?  Well, not exactly.  The “six-month presumption,” as it’s called, which is mentioned in one form or another in almost every Google search result of California residency rules, isn’t all that it’s cracked up to be.  That’s not to say the amount of time spent in California doesn’t play an important role in determining legal residency.  It does.  But the real rule is more complex.  In fact, relying on the six-month figure as somehow magical can get a nonresident in tax trouble.

What Is the Six-Month Presumption?

The six-month presumption is established by regulation.  You would think it says something simple like: if you spend no more than six months in California, you’re not a resident.  That’s the popular online version.  And frankly it’s the version many auditors for the Franchise Tax Board (California’s taxing authority) seem to have in mind.  But that’s not the legal rule.

Rather, the rule has various qualifiers: if a taxpayer spends an aggregate of six months or less in California, and is domiciled in another state, and has a permanent abode in the domicile state, and does nothing while in California other than what a tourist, visitor, or guest would do, then there is a rebuttable presumption of nonresidency.  What would a tourist, visitor or guest do?  According to the regulations, nothing much more than own a vacation home, have a local bank account for local personal expenses, and belong to a “social club” (read country club).

These qualifiers call for some parsing. Continue reading →

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shutterstock_business_beach-1-300x199The 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, 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 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 taxable by California regardless of residency status.  That’s inescapable because the work is performed in California.  If all the income the worker receives during that tax year comes from the project, it doesn’t make any difference what his residency status is.

However, if the taxpayer has other sources of income, it makes a big difference.  The FTB only taxes nonresidents on income sourced to California.  But it taxes residents on all their income, from whatever source.  And the top rate is 13.3% (in 2017).

Continue reading →

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In “Nonresidents Working Remotely for California Businesses” I discussed how the internet economy, ecommerce and constant connectivity has allowed increasing numbers of nonresidents to provide services to California businesses without setting foot here.  As long as those nonresidents meticulously follow the rules, they can work remotely free from California income taxes.  Or at least they can minimize the amount they do have to pay.

But the remote economy is a two-way street.  The technology that lets a Colorado resident work for a Los Angeles firm from his offices in Boulder, also allows him to run his Colorado business while vacationing at a Southern California beach house.  More and more nonresident business owners are doing just that.  And that can lead to California tax problems.

This isn’t a theoretical issue.  The idea of taking a vacation of any significant length without doing any work is obsolescent.  Research shows over 50% of employees work while on vacation, and as to business owners, the figure is around 85%.  Moreover, since business owners can increasingly operate their business from anywhere, including a California vacation home, the lines between an extended vacation and running a business remotely are becoming blurred.  Whether this is a good or bad development, it can result in unexpected and unpleasant tax consequences.