After moving out of California, getting a job working remotely with a tech firm in the Bay Area may sound like a dream come true. Your wages are not necessarily taxable where your employer’s headquarters are located. Your place of work, your residency, and the states in which you work all have an impact on your tax responsibilities.
In general, California taxes a non-resident’s income only on income earned within California. California’s sourcing principles for employee compensation are mainly centered on the physical location of services. Look for an expert (like a tax attorney in Orange County) who can help you with difficult tax issues.
The Remote-Work Tax Problem
See an employee relocates from San Francisco to another state but continues to work remotely for the same employer in the Bay Area. The wage allocation may not be the same if the employee is not regularly traveling back to California to provide services while in California.
There are issues when:
- California withholding will continue once the employee has moved.
- The new state also requires income-tax withholding.
- The W-2 is not a true depiction of the work performed.
- An employee who works in both states throughout the year.
- With equity compensation or bonuses, there are other sourcing questions to consider.
California states that a non-resident who works out of state but visits the state on a periodic basis may be liable to California on the part of compensation earned during the workdays in California.
Step 1: You Will Establish Your Residency
First, find out when you became a resident of your state and when you ceased to be a resident of California. Maintain records to document the move, including a new lease, driver’s license, voter registration, utility bills, and proof of employment.
California normally taxes any worldwide income received during the period you were a California resident, and California-source income received thereafter if you become a part-year resident. Part-year and non-resident reporting is done using Form 540NR.
Step 2: Review your W-2 Allocation
Have your payroll/HR department look it over:
- Your official work location.
- California workdays vs. out-of-state workdays.
- California income-tax withholding.
- Report of your wages to the state on your W-2.
- Any bonus allocation or equity compensation.
If you moved and your payroll continued after you left California, ask to have your payroll reviewed and, if applicable, request a corrected W-2. Maintain written records of the request and the actual work site locations. Having an experienced tax professional (like a tax lawyer in Fresno) will make your job much easier.
Step 3: File the Proper California return
You might have California-source wages (e.g., you physically provided services in California) and still be a California non-resident, in which case you may need to file Form 540NR.
In applicable situations, California offers a workday-based approach for employees who work in both jurisdictions: California workdays divided by total workdays can calculate the California-sourced portion of compensation for employees working in both jurisdictions.
Step 4: Resolve Double Taxation
Your new state may tax your worldwide income as a resident while California taxes California-source income. This may lead to double taxation.
The California Other State Tax Credit can be a helpful way to qualify for a tax credit if the same income is taxed by both the State of California and another state. Eligibility is based on the states in question and California’s sourcing rules.
Avoid Costly Mistakes by Following These Tips:
- Keep a calendar of all the workdays in California.
- Keep travel records of work activity.
- Check paychecks following a move.
- Don’t presume that because your employer is based in California, all wages are California-source.
- Plan ahead for combined federal, California state, and new-state tax returns.
If you’re given a lot of stock comp, check it out on its own.
Gone are the days when working remotely meant that state tax liabilities were not incurred — it means more accurate residency and wage sourcing are vital. Helping to avoid double taxation is a documented work-location history, accurate payroll reporting, and correct claims of credits.
