Remember, the income sourcing is determined by the location where the employee services are actually performed, not the location of the employer. The wages from that game are taxable California-source income because he performed his employee services in California.īut what if the employee is a nonresident who never sets foot in California to perform his services? Then the source rule works in the nonresident’s favor, even if the employer is California based. It doesn’t matter which team he plays for or where he resides. The reason: as an employee of his NBA team, Harding performed his services in California on that night. When James Harden (a nonresident) travels to California to play the Lakers at Staples Center, California gets a cut of his pay for that night in the form of state income taxes. You can imagine how important the source rule is for California’s tax enforcement agency, the Franchise Tax Board, when it comes to highly compensated employees like CEOs, actors, and professional athletes. 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. 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. In other words, nonresidents pay California income taxes on taxable California-source income. That’s due to the “source rule”: California taxes all taxable income with a source in California regardless of the taxpayer’s residency. 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. 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.Ĭalifornia Tax Rules For Remote Employees Of course, this situation isn’t lost on California’s tax enforcement agencies either. 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. 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. 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.
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