CA Nonresident taxable wages

Client was a nonresident of California for all of 2021 but W-2 shows CA wages with applicable withholdings.

It's my understanding (maybe incorrectly?) that independent contractors are taxed on CA "source income" if they deliver services within CA even if their business location is out of CA. But I thought this was different for employees. Employee entirely out of state = no CA income.

However I can't find any way of apportioning a nonresidents W-2 on the CA NonResident return. And I can't find anything definitive in the instructions.

Am I missing a rule?

Thanks!

May or may not be your case but many former-CA employees who moved out of state during the pandemic "forgot" to inform their employers of the change in their state of residence, to avoid a downward salary adjustment. Since CA taxes one based on domicile, not just residency, FTB will insist that a delay in employer notification as to the change of state residency is a factor demonstrating that the employee originally did not intend the move to be permanent (not until they made up their mind and notified their employer's payroll), and therefore they intended to return and so remained a CA domiciliary taxable as a resident.

May not be your case, I don't know. Check with your client.

Thank you for your response! In my case the client was never a CA resident and was always working from home. Yet they included the wages as CA wages. And I don't see anywhere to apportion.

I am seeing this in my practice also and in discussion in another forum. What do you do when the payroll department made this mistake? I think you file the CA return disclosing the wages as non-CA source and request refund of the withheld tax. Attach a statement. Expect that the process is not going to be easy or quick.

What do you do when the payroll department made this mistake?

In my experience it is uusally not the payroll department that made the mistake. It is usually the client.
a) They didn't fill out the proper withholding forms
b) They didn't look at their pay stubs.

I think you file the CA return disclosing the wages as non-CA source and request refund of the withheld tax.

I agree.
And client should get it corrected with payroll dept now.

You might want to review Reg 17951-5 for discussion re CA's taxation of personal services and how it is allocated to CA. 17951-5(b) specifically discusses employees and the allocation of wages. The general rule is based upon duty days - days within CA vs total days. If you attach a statement, perhaps cite this reg. Perhaps also giving this reg to the employer would make them take your client's concerns seriously.

I think it's premature to be taking a position and attaching statements. TP needs to clarify what he's doing with his employer. Employers don't willy-nilly record wages earned to a random state. TP needs to fill in the blanks.

Sorry to resurrect an old thread, but I am helping my neighbor with a similar issue right now. He started a new job with a company based in CA; neighbor is a nonresident (lives in WI) and will be fully remote with no work being done in California. The company is only giving him the options to withhold CA only or CA and WI, they are not giving him the option to withhold WI only. He was unable to get a solid reasoning from the company as to why they insist on withholding CA tax if he will not have CA liability.

Other than filing the NR return at the end of each year for a refund; has anyone else found a strategy in dealing with employers who insist on incorrect withholding?

Thanks!

File a Form DE-4 withholding certificate and claim exemption from withholding.

To add to Frankly's post - claim exempt for both CA and WI and set up your client to make estimated tax payments to WI.

Even if DE-4 exempt CA wages still on W2
I just file CA 540 NR and zero wages on Schedule CA and 0 days spent in CA

Taxmaster - Correct but the client still needs to claim exempt so that $00 taxes are withheld, otherwise they tie up $$ that is unnecessary.

The need to file a 540NR is unavoidable with wages being classified as CA wages by the employer for an employee working in WI and never being physically present in CA. Should the employee actually come to the employers office in CA, the wages earned during that period of time will be taxable in CA.

Another issue that is unfortunate is that CA SDI will be w/held by the employer and up to now, I have not figured a way to avoid this for my clients in similar situations.

Thanks all for the tips!