Live in One State & Work in Another? Beware the Telecommuter Tax Penalty

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This past week I got a question at the First Class Lounge Forum from a lady who lived in FL and worked as an Independent Contractor part time for a CA business and full-time for a business in FL.

She was surprised to get a notice from CA claiming she owed taxes.

I gave her the simple “it depends” answer and then got to work finding out what it really depends on these days.

If you work as an employee (not an independent contractor), the answer, sadly, is pretty simple. If she was a W-2 employee, she would owe the CA taxes. FL doesn’t have a state income tax, so she isn’t stuck like some state residents who end up paying both the tax to the state they live in and the state they work in. Here’s an interesting story about the problem that is occurring with New York workers.

But now as an independent contractor, there is the question whether she has a Florida business. If her business is in Florida and the work is performed in Florida, then she has a good argument that there is no California income tax due. But if the work is performed in California and if she doesn’t really have a business, is in fact a quasi-employee, then there is CA tax due.

Unfortunately, this is the type of fact pattern that court cases are made of. There aren’t a lot of clear bright-line definitions of when the tax would be due and when it isn’t. California, of course, will take the position it’s due and it’s up to you to prove otherwise.

Now, let’s look at the reality. Let’s say she ignores the notice. If she doesn’t have any assets in California, it’s unlikely that there is anything CA can seize. But they can get a judgment and that will affect her credit. And it will also stop her from ever having an asset in the state of California.

So the reality – as sad as it sounds, if the tax isn’t too much, the best advice might be to just pay it. One advantage she does have, though, is that because she’s an Independent Contractor and not an employee she’ll be able to take deductions first before she comes up with the net income amount. The tax will be due on the net income amount.

The Internet has changed everything – how we work, how we play and now, how we figure out our taxes.

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