December 2020 Newsletter: Franchise Tax Board & CSEA Liaison Meeting
This article is the first in a series of questions and answers on California tax agency issues. This month’s questions and answers will focus on income sourcing for nonresidents temporarily relocated to California as well as the return of the Shared Responsibility Penalty which will now be enforced by the State of California Franchise Tax Board. They are taken from the State Tax Agency Liaison meetings (STALM) held virtually in October 2020.
As a result of COVID-19, the number of people working remotely has increased significantly. Many of these new situations involve people working from a residence in one state, for an employer in a different state. For example, if a taxpayer is a teacher employed in Washington state, but temporarily living and teaching out of their parents’ residence in California due to COVID-19, will they be required to file a CA tax return because of this unique situation?
How would FTB address this and other similar situations? What are the rules for how FTB treats nonresident workers, and are there any COVID-19-based exceptions in place?
Income of nonresident employees is sourced based on where they perform the services, Regulation 17951-5. Therefore, in your example, the Washington school teacher living temporarily in California and teaching from here during COVID-19, would have California- sourced income based on the fact that they are working (performing their services) in California as an employee.
The FTB has posted a question with three scenarios for this topic in its COVID FAQS on the FTB website:
Scenario 1: You work for an out-of-state employer and receive a W-2 from them. You temporarily relocate to California. Do you need to file a California return and pay California income tax?
Answer: Yes. As a nonresident who relocates to California for any portion of the year, you will have California source income during the period of time you performed services in California. You will need to file a California Nonresident or Part-Year Resident Income Tax Return (Form 540NR) return to report the California sourced portion of your compensation. 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.
Scenario 2: You work for a California employer and receive a W-2 from them. You relocate temporarily to California. Will you need to file a California return and pay California income tax?
Answer: You need to file a California personal income tax return if you performed services in California for wages. Where you performed services determines how you file your taxes (not the location of your employer). Review Scenario 1 for more information.
Scenario 3: You’re an independent contractor who relocates temporarily to California. You have not had previous source income from California. Will you need to file a California return?
Answer: Maybe. If you are a nonresident independent contractor whose income was not previously considered California source, you would not create California source income simply by relocating temporarily to California. If a customer in California receives the benefit of your services in California, you will need to file a return.
California source income for independent contractors is determined by looking to where the benefit of the service is received. The location where the independent contractor performs the work is not a factor.
As a result of COVID-19, a larger percentage of taxpayers will likely be impacted by the new individual health care mandate rules which became effective January 1, 2020. Since many individuals who lost their jobs as a result of COVID19 may also lose their employer-based health insurance coverage, it is reasonable to suspect that a larger percentage of taxpayers may experience a period of time without health insurance, and may fall below California’s 600% of the federal poverty level threshold to qualify for a subsidy under Covered California.
How will Covered California report the necessary information regarding coverage to taxpayers and/or FTB? Are any draft forms available?
Is FTB aware of any proposed extension to the three-month coverage gap exception for avoiding the individual health care mandate penalty as a result of COVID-19?
We are happy to share that Covered California has kept their open enrollment period available to the public for the entirety of the year, thus far. They have seen record enrollment, helping to ensure that people who need coverage have been able to secure it. Additionally, each person who enrolls with Covered California is evaluated for their potential eligibility to receive financial assistance. When taxpayers file their 2020 CA state income tax return and reconcile the financial assistance they received from Covered California, FTB will also evaluate the amount they should have received based on their individual tax situation, and will increase their subsidy amount if what they received was less than the maximum, they were eligible for. This “true up” will occur on the tax return, through a reduction in their balance due or an increase in their refund.
Covered California will report coverage information about coverage and financial assistance to FTB and enrollees via the new FTB 3895. The look and feel of the form is very similar to the federal 1095-A, but with CA specific information, rather than the federal information.
Finally, at present, FTB is not aware of any proposed changes to the current structure or duration of the short coverage gap exemption as prescribed in SB78.
IRS is tasked with collecting the Shared Responsibility Penalty under ACA. However, IRS is prohibited from taking enforced collection action for this specific penalty. California now has the individual health care mandate requiring health care coverage beginning January 1, 2020, and taxpayers will report, on their Form 540, a related penalty for failing to have coverage for 2020.
Will FTB use all their enforcement tools to collect the penalty? What can we expect from FTB concerning collection of this particular penalty if it is not paid? Will FTB be allowed to apply a taxpayer’s payment to this penalty amount first, before applying the payment to income taxes, as it is allowed to do with use tax?
California Senate Bill (SB) 78 (2019-2020) prescribes that FTB shall collect the Individual Shared Responsibility Penalty (ISRP) through use of all normal collection methods, except for liens or levies on real property and criminal prosecution. Therefore, taxpayers and their representatives can expect that the scope of collection activities will occur via the normal processes, with the exclusion of the items mentioned above.
FTB will continue to apply all payments in their normal application hierarchy. Payments cannot be applied to the ISRP before tax.
We will include two or three additional Q&A’s in future newsletters. - AA
Alfredo Arce | 01/22/2021