Wild Rise
Thanks to remote working, the relationship between an employee and employer has become more ambiguous with regard to geographical location. When you are not a California resident, but you work remotely for a California-based business, it may seem that California can tax your wages. The question is more often than not no longer where you actually work, but where your employer is based.
Source of Wages
Wages, for California income-tax purposes, usually have their source at the place where the income is earned. The source is not necessarily determined by the employer’s address, or the address where you are paid. You must look for a professional (similar to a tax accountant attorney) for some help.
For instance, if you have a home in Texas, and you work for a California employer, but you live in Texas on a long-term basis, and perform all of your work from your Texas home for your California employer, these wages are not considered California-source income because the employer is a California employer.
If you report the income from the California workdays as California-source income, however, and then move to California, the income from those workdays may be treated as California-source income.
What If You Split Your Time?
Things get trickier if you’re working from more than one state.
California’s FTB notes that in general, a nonresident who performs services in California will need to allocate compensation based on the amount of services provided in California. A sensible strategy is through a workday ratio:
This is the California-source percentage: (California workdays/total workdays).
The percentage can then be used in conjunction with the applicable compensation to arrive at the portion of compensation attributable to California.
Maintain an accurate log of work sites, particularly if traveling back and forth between California and another state.
What About Tax Withholding?
Taxable wages and withholding are normally reported on Form W-2 by your employer. The W-2 reports federal, state, and other taxes that were deducted from your payroll.
For a nonresident who performs some services in California, California withholding may apply to the amount of compensation earned for services performed in California. California also has rules for withholding payments to nonresidents, but there are differences in the withholding of wages and some payments to independent contractors.
Be aware that some of your wages are not necessarily subject to California withholding. The rules of underlying sourcing and residency remain for the most part.
Do We Need to File in Two States?
Potentially. You might need to file in California and in another state if you have wages earned in California.
The general rule is that California will require the reporting of income from California sources for non-residents. In California, however, the state tends to tax your income whether or not it is earned in California. Always choose a qualified professional (like a tax attorney in LA) who can guide you properly.
Depending on the states involved and the tax rules, a state tax credit can sometimes minimize double taxation when two states tax the same income.
Important Remote-Worker Tips
- Record days worked: Be sure to keep a record of days physically worked in California and other areas.
- Review W-2: Make sure no discrepancies are present in the California wages and withholding.
- Know how to determine residency: Residency does not need to change when you move out of California.
- Be aware of special California sourcing rules for equity compensation, such as RSUs and stock options.
- Review both aspects: Residency and sourcing requirements may vary from one jurisdiction to another.
Not everything that is earned in California as a remote employee is subject to California taxes. You may owe the FTB, and the amount owed can vary by your residency, physical work location, California workdays, and type of compensation. Having detailed records and knowledge of multi-state filing requirements will help avoid unexpected costs.
