With the rise of ecommerce, advanced telecommunications, and the new prevalence of remote work due to the COVID emergency, more and more people are choosing the option of living in one state while working for an employer in another, without ever setting foot at the employer’s place of business. The possibilities for reducing state income taxes through this scenario haven’t been lost on founders, hi-tech C-suite, and other key employees in California. By moving across state borders and working for a California business (or even running it) through Zoom and other telecommunications, they become nonresidents, potentially free of California’s high income tax rates, while still being able to participate in California’s thriving economy.
Of course, this situation isn’t lost on California’s tax enforcement agencies either. Because of that, remote workers need to be careful and understand the tax rules for nonresidents working for California firms, at least for highly compensated former residents.
California Tax Rules For Remote Employees
Generally if you work in California, whether you’re a resident or not, you have to pay income taxes on the wages you earn for those services. That’s due to the “source rule”: California taxes all taxable income with a source in California regardless of the taxpayer’s residency. In other words, nonresidents pay California income taxes on taxable California-source income. With respect to employees, the source of income from services compensated by W-2 wages is the location where the services are performed, not the location of employer. This is true even if you are a nonresident, even if the employment agreement with the employer is made out-of-state, and even if the wages are paid to you outside of California.