State Witholding / Bonus question

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Dilbydog
Posts: 99
Joined: Mon May 23, 2016 10:17 pm

State Witholding / Bonus question

Post by Dilbydog »

I have a question regarding the state withholding of a bonus. A little background:

I currently work for a California company, but have been assigned full time to projects in Nevada (No state income tax) since 2013. My sole residence is in Nevada, I have a NV ID, all my vehicles are registered in the state of Nevada, my pay stubs are sent to my Nevada residence.

My company issues incentive bonuses 45 days after the end of the quarter in which the project closes. In this example, my project closed out in Q4 of 2016, thus my bonus will be paid on 2/15.

Here's the rub: My current project finished late 2016, and my next assignment was delayed, so I've been working on some smaller assignments at my home office. Earlier this month I was approached and asked if I could temporarily (3 months max) help out with a project back in California. I agreed and began traveling to California M-Th. My company has notified me that my upcoming bonus, due 2/15 would need to have 10.93% deducted for CA witholding, now that I'm working I CA. I objected, stating that my CA position is temporary and that the bonus was based off Q4 of 2016 determination, in which I was physically in NV. The counter from the company is that that my residence status is "murky" since we don't know if my next full time project will be in NV or CA. I plan on keeping my NV residence no matter where my next project, as our current pipeline shows many years of work in Nevada. I don't believe that CA can collect taxes on income that was clearly derived from an out of state project by an out of state resident. Is this accurate?

Thanks
Alan S.
Posts: 10170
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: State Witholding / Bonus question

Post by Alan S. »

According to this paragraph from CA FTB material, none of the work for which this bonus was paid was CA source income. Therefore, CA tax should not have been withheld.
In determining whether compensation is California source income after a taxpayer becomes a nonresident during the year or is a nonresident for the entire year, we tax on a source basis. The critical factor in determining the source of income from personal services is not the residence of the taxpayer, the place where the contract for services is entered into, or the place of payment. It is the place where the services are actually performed. See the Appeal of Janice Rule, 1976-SBE-099, October 6, 1976; Ingram v. Bowers, 47 F. 2d 925, aff'd. 57 F. 2d 65; Appeal of Charles W. and Mary D. Perelle, 1958-SBE-057, December 16, 1958; and Appeal of Robert C. and Marian Thomas, 1955-SBE-006, April 20, 1955.
It may be too late for the employer to recover the withholding, and you will be working in CA for awhile anyway so may have to file a CA non resident return for 2017. However, if you can get the employer to issue your 2017 W-2 with this bonus as NV income, you would get credit for the WH against your CA taxes for 2017 work in the state. Meanwhile, for cash flow purposes you should file a W4 to reduce withholding on the current project since CA already has this withholding. Another question is why the rate was near the top rate. If the bonus was not very large, you might settle for a commitment to get the 2017 W-2 correct and not push them too hard to recover the recent withholding, just reduce your withholding for the upcoming project. That in effect may recover the bulk of the amount withheld in the next couple of months. Again, depends on the amount of the bonus and the amount you earn on the current project in CA.
Topic Author
Dilbydog
Posts: 99
Joined: Mon May 23, 2016 10:17 pm

Re: State Witholding / Bonus question

Post by Dilbydog »

Alan S. wrote:According to this paragraph from CA FTB material, none of the work for which this bonus was paid was CA source income. Therefore, CA tax should not have been withheld.
In determining whether compensation is California source income after a taxpayer becomes a nonresident during the year or is a nonresident for the entire year, we tax on a source basis. The critical factor in determining the source of income from personal services is not the residence of the taxpayer, the place where the contract for services is entered into, or the place of payment. It is the place where the services are actually performed. See the Appeal of Janice Rule, 1976-SBE-099, October 6, 1976; Ingram v. Bowers, 47 F. 2d 925, aff'd. 57 F. 2d 65; Appeal of Charles W. and Mary D. Perelle, 1958-SBE-057, December 16, 1958; and Appeal of Robert C. and Marian Thomas, 1955-SBE-006, April 20, 1955.
It may be too late for the employer to recover the withholding, and you will be working in CA for awhile anyway so may have to file a CA non resident return for 2017. However, if you can get the employer to issue your 2017 W-2 with this bonus as NV income, you would get credit for the WH against your CA taxes for 2017 work in the state. Meanwhile, for cash flow purposes you should file a W4 to reduce withholding on the current project since CA already has this withholding. Another question is why the rate was near the top rate. If the bonus was not very large, you might settle for a commitment to get the 2017 W-2 correct and not push them too hard to recover the recent withholding, just reduce your withholding for the upcoming project. That in effect may recover the bulk of the amount withheld in the next couple of months. Again, depends on the amount of the bonus and the amount you earn on the current project in CA.
Thanks Alan... the bonus amount is $350k, and I anticipate making $33k while in CA. Then again there's the outside chance that the "temp" thing extends to the end of the year... so in that case $120k would earned in CA for 2017.
Alan S.
Posts: 10170
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: State Witholding / Bonus question

Post by Alan S. »

350k! Well, that explains the 10.9 rate. Given the amount in question here, you might want to review the entire source income material here:
https://www.ftb.ca.gov/aboutFTB/manuals ... m/3000.pdf

The small portion I posted above is from p 24. The amount involved also increases the chances that some exception could apply that I am not aware of since this employer deals with CA frequently and they probably know FTB rules quite well. Harvesting taxable income from NV residents is certainly a cottage industry in Sacramento, so you might be in for a battle here.

If you don't mind, let us know if the employer cites a different Regulation as applicable here.
Topic Author
Dilbydog
Posts: 99
Joined: Mon May 23, 2016 10:17 pm

Re: State Witholding / Bonus question

Post by Dilbydog »

Will do... company hasn't made a determination yet. I'm baffled as there is no question I am a Nevada resident, and the project in question was also in Nevada.
Post Reply