By George Paulsen, CPA, Hood & Strong LLP
Throughout California and across the country, many of us are working almost exclusively from home during the COVID-19 pandemic. We must all be careful of the definition of home – young employees could have moved back home with their parents, while others might have chosen to get away to their vacation home to work.
Federal law, and many state laws, look at residence differently. The federal government has a residency test for people who enter or leave the country. California and many other states have domicile laws based on where you sleep, and other factors such as where you vote and keep property. Six months usually prevails as proving domicile.
As an example, a San Francisco employee at the end of March gives up their lease and moves in with Mom and Dad in Montana but continues to work with their employer in San Francisco using phones, email and Zoom. If the employee expects to come back, he may be working in Montana and must file a Montana return while there. He would also file a California return as a resident and pay tax there as well and get a tax credit for tax paid to Montana. The taxpayer may end up with a considerable underpayment in one state.
For that same person, if they change their domicile to Montana and are out of California more than six months, change their voting address and vehicle license, and cut off ties with California, they will file a part-year return for the time in California, a part-year return in Montana, and split the income between the states. One of the Franchise Tax Board’s (FTB) biggest audit groups audits final California returns for people moving out of state so understanding the law is crucial. The employer should be directed by the employee as to where they are domiciled so proper withholding can be provided on the paychecks.
To keep talent or hire talent not available locally we, like our clients, have employees in other states. This can bring up several issues that have to be managed. What state gets to tax the wage, and could the employee have to apportion their income to several states? Companies can get trapped by economic nexus and pay tax in a state they may have little or no revenue from. A new wrinkle regarding COVID-19 is if your employee lives in Oregon and the employer is in California, which state laws direct COVID coverage for the employee?
The FTB has clarified taxable nexus to California will not be established for an out-of-state corporation whose only connection is the presence of an employee who is working here due to the governor’s “stay at home” directive. It is not clear if another state’s shelter-in-place order will prevent California nexus and the business may have to file and report apportioned income to California. Also, the employee while working in California, must report their income earned while here and file a return. As an example, a Washington-based employee that is living in California during the pandemic will have to pay California income tax on the money they made while living in California, even though Washington has no income tax.
As you can see, the new economic nexus laws coupled with COVID-19-induced changes to our normal way of life have created a new tax normal for employees and employers.
Contact AEIS Today
Reach out to us at AEIS, Inc. at Alyssa@AEISAdvisors.com if you would like to be connected with George Paulsen and his team of tax advisors and CPAs at Hood & Strong, LLP who can help you navigate the various state and federal tax laws for your remote employees.
This post was originally published in Hood & Strong’s Newsletter.
Disclaimer: Any information related to compliance or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.