California tax withholding for ICs

This came up at the Restuvus MT forum. For some reason, people started e-mailing me (maybe because I live in California, maybe because I’m a loudmouth – hard to tell) and I decided to blog it because Restuvus doesn’t archive their conversations and this one should stick around for awhile.

I’m not going to go into the whole story or link to the original post (because it’s just going to move off the page and be lost forever anyway), but here’s the general idea. The original poster (OP) did some work as an independent contractor for an MTSO in California. The 1099 she received had, for some inexplicable reason, the correct name but the address on it was the MTSO’s address in California. She then asks how she proves she’s not a California resident so she doesn’t have to pay 7% income tax in California.

There are many things wrong with this. First of all, whoever did the 1099s needs to go back to tax school. The address of the person the 1099 is being issued to is what’s supposed to be on the 1099, not the address of the person they did the work for. My advice? Send the MTSO a letter requesting that the 1099 be reissued with the correct address and send a copy of the letter to the California Franchise Tax Board.

Second of all, the withholding being referenced doesn’t go into effect until January 1, 2010, and even then it doesn’t apply in this situation.

Beginning January 1, 2010, the state of California is requiring payers to withhold 7% tax on reportable income for non-resident workers. There are details and notable exceptions of course. Companies and individuals doing work in California needs to download the guidebook (PDF) and read it.

The state of California is, as most of us already know, broke and grasping at straws. It seems the purpose of this particular requirement is to make sure it captures revenue that has been lost due to not being reported. This law will most affect people who come to California from out of state, work for a short period of time, then return home. It targets California non-resident independent contractors specifically.

But here’s the catch: the work must be performed in the state of California. Which lets out remote workers because you aren’t actually located in California. You can work for an MTSO located in California on an account for a hospital in California, but as long as your butt is in a chair in Kansas or anywhere else that isn’t California, you are exempt.

Download the guidebook and read it. I find the horse’s mouth is always the best place to get information. And my husband (a CPA) says you should never take tax advice from anyone but a tax professional. (I’m sure he means this as a warning to me, should I be inclined to give out tax advice on this blog!)

Under the microscope: FutureMT

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