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Tax Law

California May Be First to Allow Employers to File Group Income Taxes for Foreign Workers

On May 18, 2020, the California Assembly Revenue and Taxation Committee unanimously passed Assembly Bill 2660 (AB 2660) out of committee. AB 2660 would allow employers to file income taxes on behalf of their foreign workers, specifically providing for the optional filing of a group return by the employer for electing foreign workers who receive taxable income for services that are performed in California.

Existing law requires employers who pay wages to nonresident employees for services performed in California to deduct and withhold from those wages specified taxes and to make returns, reports, statements, and other documents related to the wages paid and withheld. The stated purpose of AB 2660 is to ease compliance standards for employers and foreign workers in circumstances where filing requirements may be difficult to meet when foreign workers have trouble obtaining taxpayer identification numbers.

The tax rates applicable to each nonresident electing to file in the group return would consist of the highest marginal rate provided by the Personal Income Tax Law plus an additional 1% for foreign workers with income in excess of $1 million. In most cases, deductions or credits will not be allowed; however, amounts withheld during any calendar year are permitted to be a credit against the tax for the taxable year. AB 2660 would become effective January 1, 2021 and remain in place until January 1, 2026.

The biggest proponent of AB 2660 is the California Lawyers Association Taxation Section, which sees the bill as a way to ease tax compliance for both employees and employers. Proponents believe this voluntary option is “commonsense”, easing tax burdens for employers and employees alike by eliminating a foreign employee’s current requirement to file tax returns individually, and making compliance for employers easier by eliminating the requirement for employers to provide an employee’s social security number or other identifying number on its withholding statement that is not available. The fiscal effect of the bill is estimated to generate $12 million in fiscal year (FY) 20-21, $27 million in FY 21-22, and $34 million in FY 22-23.

Some opponents believe this is just an attempt by California to shift the foreign worker’s filing obligation to the employer. Additionally, other employers are concerned about how the state reporting may affect federal reporting and about issues related to enforcement if it becomes law.

This is the first bill of its kind in the United States. AB 2660 passed by a vote of 11-0 before the Assembly’s Revenue and Taxation Committee, and now moves to the Assembly Appropriations Committee. It will need to receive a passing vote by the Assembly by June 19 to move to the Senate for debate this year.