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 when it comes to highly compensated former residents.Ĭalifornia Tax Rules For Remote Employees: The Basics Of course, this situation isn’t lost on California’s tax enforcement agencies. 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. "As a taxpayer, you can't just assume the state isn't going to go after you," she said.With the rise of ecommerce, advanced telecommunications, and the new prevalence of remote work due to the COVID pandemic, 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. And it's quite possible that states will step up their enforcement efforts. A similar measure is pending in the House.Īnother Senate bill (with a related one in the House) would limit the ability of states to impose the "convenience of employer" rule on nonresidents. All of these measures have been idling in Congress since early 2021, however.Īlso, although some states may have modified or eased their rules earlier in the pandemic, you shouldn't count on that persisting, Walker said. There's a chance that the taxation of remote workers could change at some point, given the pandemic-spurred growth of the nation's mobile workforce (45% of full-time employees were working partly or fully remotely in September, according to a Gallup poll).Ī bipartisan bill in the Senate, the Remote and Mobile Worker Relief Act of 2021, would prohibit states from taxing or requiring withholding for nonresident employees who are in a state for fewer than 30 days. Regardless of your employment situation, it's worth consulting with a tax advisor if you think you may need to file a return in multiple states. The bigger question is whether another state has the authority to, as well. And still others have a wage-based threshold for taxation, while nine states have no income tax at all.īe aware that your state of residence generally has the right to tax your income, no matter where it was earned. Other states' thresholds kick in faster, including 23 that expect you to pay taxes from day one of working there. Different states have different approaches for when they expect you to tell them about income you earned while there.įor example, some states let nonresidents work within their borders for at least 30 days without a withholding requirement. More from Personal Finance: Here’s what’s new with 401(k) plans this year 3 key reasons to keep your will or estate plan updated What's new with required minimum distributions "If you spent a significant time working out of another state in the last year, you very likely will have an income tax liability there," said Jared Walczak, vice president of state projects for the Tax Foundation. Personal Loans for 670 Credit Score or Lower Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit
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