California Non-resident Income Tax Deductions

I am the owner, sole share holder and sole employee of a technology consulting company. The company a personal services corporation and a C Corporation. We are based in New York, though we have clients in many states and a couple of foreign countries.

While the company charges a fixed hourly rate for my services, I do not have a fixed hourly salary. I get paid by the "whatever is left after overhead and expenses" principle. At the end of each year my company income is typically less than $300, and we pay the minimum New York State Income Tax of $75.

I have a client in California. The client is a law firm, but my expenses are being paid by a large insurance company. This year the insurance company has started to withhold funds from our checks that they say are for California Income Tax Withholding. (I say that "they say" because there is no indication on the check stubs to account for the missing funds,and I think this, all by itself is very unusual.)

Almost all of the money represented by these covers services provided while I was in New York and expenses, but I did spend three days working in California in March.

So, here are the issues. If the insurance company persists in this behavior, I will have to file a California Non-Resident Corporate Income Tax return to recover the amounts withheld, since the income of my company will be most certainly be below the taxable minimum.

I will most likely have to also file a California Non-resident Income Tax Return and then claim a credit for those payments on my New York Resident Income Tax Return.

The big issue is how I figure out my California Source Income. First, I don't know exactly how many hours I was in California. I have good records for the three days, but what about the two flights on the day before and the day after my three-day visit? How do I know when I crossed the California border when we were 30,000 feet in the air? Or, do I just use hours billed between landing in CA to takeoff? (Yes, I bill for travel time, which would add a few hours between the airport and the hotel.)

Even after I figure out the billable hours in California, how do I get a rate? I suppose I could take my total annual gross income from the company and divide that by the number of hours billed during the year to get an average personal income hourly rate per year. Does that make sense? (However, I'm a cash basis business, so some of my 2016 income was for work done in 2015 and paid in 2016, while some of my

2016 hours will not be paid until 2017.)

I also remember reading that there was an income floor below which no California Non-Resident Income Tax was due. I seem to remember that as was about $30K, but can no longer find that.

Thanks in advance for any advice.

Reply to
Victor Roberts
Loading thread data ...

I think the first thing you need to do is find out why there is CA income tax withholding (I assume it is 7%). Here is what the CA FTB says when withholding for a nonresident is required related to expense reimbursement (FTB Pub 1017). I know of no other requirement for withholding other than the 7% being withheld on income items.

  1. Is withholding required on payments made to reimburse expenses?

If the reimbursement is separately accounted for and is not subject to IRS Form 1099 reporting, withholding is not required on payments to reimburse nonresidents for expenses related to services performed in California (corporate payees, for purposes of this exception, should be treated as individual persons). When the reimbursed expenses do not meet these requirements, withholding agents should withhold on the total payment

Basically, it says if you are being reimbursed via an accountable plan, there should not be any withholding.

Reply to
Alan

Thank you for the reply. A portion of the total billed was for reimbursable expenses, such as Travel & Living, but a portion of the rest was for professional services provided while in California. They did, however, withhold from the total amount billed, even though the reimbursable expenses were listed in a separate section of the invoice.

I also found out that I am not required to file a personal income tax return in California for the income I earned as part of this assignment. In 2015, individuals over 65 who were Married, filing jointly or separately, with no dependents, did not have a California filing requirement if their California Adjusted Gross Income was less than $36,912. I was in California for the equivalent of only four days. While I consider myself well-paid, I do not have a personal Gross Income from this activity that is anything close to $9,000 per day

I will check FTB Pub 1017.

Reply to
Victor Roberts

Unfortunately, you have misinterpreted the CA filing requirements. Chalk it up to poorly worded documents. CA Adjusted Gross Income in the Who Has To File Chart is your federal AGI adjusted for CA law. E.g, If your federal AGI included interest on T-Bills, your CA AGI would exclude that. If your federal AGI included taxable social security, your CA AGI would exclude that, etc. In other words, if you are a nonresident with CA source income and your Federal AGI adjusted to CA law exceeds the amount in the table, you have a filing requirement.

This method is a way for states to maximize their tax revenue. Keeping it real simple..(actual computations vary) the state computes your income tax based on what-if you were a resident. Then it computes a ratio of state source income to its equivalent federal income (typically it is AGI) and applies that ratio to the what-if tax. So, unless some personal exemption or deduction or credit wipes out the tax even a small amount of source income can trigger state income tax.

Reply to
Alan

Even with that change, I will still not have a personal filing requirement in California for this small income. I will, however, have my accountant check my assumption.

Reply to
Victor Roberts

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.