Remote Work and California Taxes

Remote work created tax questions that most employers and employees answer by assumption, and the assumptions are usually wrong in the same direction: people believe tax follows the employer’s location, when it generally follows where the work is physically performed.

For California the stakes are higher than elsewhere. The state has the country’s highest top marginal rate at 13.3%, applies an aggressive residency standard, and can establish nexus over an out-of-state business based on a single employee working from a California bedroom.

We advise employers and remote workers in Temecula, Murrieta, San Diego, Riverside, and San Bernardino, and out-of-state companies with California workers.

Residency Comes First

Everything follows from residency, and California residents are taxed on worldwide income regardless of where it is earned or where the employer sits.

California presumes continued residency until domicile is affirmatively changed. FTB Publication 1031 applies a closest-connections analysis across roughly nineteen factors — where the home, family, vehicles, professional licenses, physicians, bank accounts, and social ties are located. A 546-day safe harbor covers certain employment-related absences, and a rebuttable presumption applies to taxpayers present in California more than nine months of the year.

Remote work made departure look easy and made proving it harder. Someone who moves to Nevada but keeps the California house, the California doctors, and returns most weekends has not clearly changed domicile — and the state examines these situations actively, with residency audits of out-of-state filers up 126% between 2019 and 2023.

Where a move happens mid-year, income is generally allocated between the resident and nonresident periods, which makes the timing of a bonus, an option exercise, or a business sale genuinely consequential. See FTB matters.

Nonresidents Working for California Employers

This is the point most often misunderstood, and here California is favorable.

Compensation for services is generally sourced to where the services are performed. A nonresident who works entirely from Arizona for a San Francisco employer is generally not earning California-source wages, even though the paychecks come from California.

California does not apply a “convenience of the employer” rule. Several states — New York most prominently — tax a nonresident’s income when they work remotely for convenience rather than employer necessity. California does not, which means a genuine out-of-state remote worker for a California company generally escapes California tax on those wages.

Two qualifications. Days physically worked in California are California-source and are allocated accordingly, so a remote employee who visits the office monthly has a California filing obligation on those days. And equity compensation is allocated over the period between grant and vesting, so options earned while a California resident retain California source even if exercised years later from another state.

Residents Working for Out-of-State Employers

The reverse case is simpler and less favorable. A California resident working remotely for a company anywhere in the world owes California tax on that income. Residency, not the employer’s location, controls.

Where another state also taxes the income — because the worker spent days there, or because that state applies a convenience rule — California generally allows an other state tax credit, which prevents double taxation but does not reduce the total below the higher of the two rates.

The New York interaction is worth flagging: a California resident working remotely for a New York employer can face New York tax under its convenience rule and California tax as a resident. The credit mechanics in that scenario are technical and worth reviewing rather than assuming.

What a Remote Employee Creates for the Employer

This is the exposure companies most often miss, and it can arise from a single hire.

An employee working from California generally creates nexus for the employer, which can bring:

• Registration with the California Secretary of State as a foreign entity doing business here
• Franchise tax — the $800 minimum at a minimum, plus tax on apportioned income
• Payroll registration with the EDD, required within 15 days of paying $100 in wages in a quarter
• California withholding, unemployment insurance, employment training tax, and SDI at 1.3% for 2026 with no wage cap
• Wage and hour compliance — California’s overtime, meal and rest break, and expense reimbursement rules apply to work performed here

The expense reimbursement point catches employers repeatedly. California Labor Code section 2802 requires reimbursement of necessary business expenses, and for remote workers that has been read to include a reasonable portion of internet and phone costs. It is not a tax rule, but it arrives with the same employee.

Public Law 86-272 offers no help here. It protects only companies whose sole in-state activity is soliciting orders for tangible personal property, and it does not cover services, licensing, or an employee performing non-solicitation work from a home office.

California uses single-sales-factor apportionment with market-based sourcing, so the employee creates the filing obligation while the income apportioned to California is driven by where customers receive the benefit. See corporate tax.

Independent Contractors

Engaging a California-based contractor instead of an employee does not avoid the analysis and introduces a larger risk.

California applies the ABC test under AB 5. A worker is presumed an employee unless the hiring entity establishes all three prongs, and prong B — that the work is outside the usual course of the hiring entity’s business — defeats most classifications. A software company engaging a remote developer as a contractor fails prong B regardless of how the relationship is documented.

Reclassification produces EDD assessments for unpaid payroll taxes, penalties, and interest, plus parallel wage and hour and benefits exposure. See business tax audits.

Practical Compliance

For workers: keep a contemporaneous record of where you worked each day. Day-count records decide both residency and sourcing disputes, and they cannot be reconstructed credibly years later. Where a move is intended, change the substance — driver’s license, vehicle registration, voter registration, physicians, banking, and where the family actually lives — not just the mailing address.

For employers: know where every employee physically works, and treat a change of address as a compliance event rather than an HR update. A written remote work policy specifying approved work locations is the cheapest available control. Register before problems accumulate — an unfiled return leaves the assessment window open indefinitely, so exposure compounds silently.

Multi-State Workers and Reciprocity

Remote arrangements frequently involve more than two states, and the rules do not combine cleanly.

Where an employee works in several states during the year, wages are generally allocated by days worked in each state, and filing obligations can arise in each — subject to varying de minimis thresholds that some states apply and others do not. A traveling salesperson or a consultant working at client sites can accumulate several nonresident filings from a single job.

Reciprocity agreements between certain states allow a resident of one to be taxed only by their home state on wages earned in the other. California has no reciprocity agreements with any state, so a nonresident working days in California files here regardless of where they live, and a California resident working elsewhere relies on the other state tax credit rather than an exemption.

The credit mechanics matter. California’s other state tax credit is limited to the California tax on the doubly taxed income, so where the other state’s rate is higher the excess is not recovered. Where the other state’s rate is lower, California collects the difference. Either way the total lands at approximately the higher of the two rates rather than the lower.

For employers, this means payroll systems must track work location rather than home address, and multi-state withholding is a configuration problem that compounds quietly as remote hiring expands.

Frequently Asked Questions

I live in Nevada and work remotely for a California company. Do I owe California tax?

Generally not on wages for services performed in Nevada. California sources compensation to where the work is done and does not apply a convenience of the employer rule. Days worked physically in California are California-source.

I live in California and work for a company in another state. Do I owe California tax?

Yes. Residents are taxed on worldwide income regardless of the employer’s location. A credit may be available for tax paid to another state.

Does one remote employee really create tax obligations for my company?

Generally yes. An employee working from California typically creates nexus, bringing registration, franchise tax, payroll registration, withholding, and California wage and hour obligations.

Does Public Law 86-272 protect us?

Only for companies whose sole California activity is soliciting orders for tangible personal property. It does not cover services or an employee performing other work from home.

Can I hire a California worker as a contractor instead?

Only if the ABC test is genuinely satisfied. Prong B — work outside your usual course of business — defeats most such classifications, and reclassification carries payroll tax, wage and hour, and benefits exposure.

I moved out of California. Why did I get a residency questionnaire?

Because California presumes continued residency until domicile changes, and it examines departures actively — particularly where a large gain, bonus, or option exercise falls in the year of the move.

What about stock options earned in California?

Equity compensation is generally allocated over the period between grant and vesting. Options earned while a California resident retain California source even if exercised after moving away.

Sort the Facts Before They Are Examined

Remote work disputes are decided by day counts, addresses, and documents — all of which exist now and become much harder to establish later. For employers, the exposure grows quietly with every unregistered state; for workers, it turns on a record that only they can create.

Pietro Canestrelli holds an LL.M. in Taxation and advises employers and remote workers on residency, sourcing, nexus, worker classification, and California registration and withholding obligations. Schedule a consultation, or review our corporate tax and income tax services.