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The pandemic-driven normalization of remote work created new complexity in state tax compliance that most companies didn’t anticipate and many haven’t yet resolved. For California-based companies with remote employees in other states, the state tax implications cut both ways: some California employees working remotely from other states may reduce California payroll tax obligations, while some non-California employees working remotely for California companies may create unexpected tax obligations in their home states.
The California Employer’s Remote Employee Problem
When a California company hires an employee who works remotely from Texas, Arizona, Nevada, or any other state, that employee’s wages are generally not subject to California income tax withholding — California income tax applies to California-source income, and wages earned by a Texas resident working in Texas for a California employer are Texas-source income, not California-source income. The California employer must instead withhold the employee’s home state income tax (if any), register as an employer in the employee’s home state, and comply with that state’s employment laws — including its own wage payment rules, leave requirements, and anti-discrimination provisions.
This creates a compliance burden that is often invisible until it becomes a problem: California companies with remote employees in 10 different states have compliance obligations in 10 different state employment law systems. Payroll services like Gusto, Rippling, and ADP handle the multi-state payroll withholding mechanically, but they don’t manage the underlying compliance with each state’s employment law requirements.
The California Employee Working Remotely From Another State
When a California employee temporarily works from another state — on vacation, caring for a relative, or simply choosing to spend time elsewhere — the tax implications depend on the length of time and the other state’s rules. California generally continues to tax California residents on all of their income regardless of where earned. If the employee is still a California resident (they haven’t genuinely relocated), their wages remain subject to California income tax withholding regardless of where they physically work.
If an employee genuinely relocates from California to another state and establishes residency there, they cease to be a California resident for tax purposes — and California can no longer tax their wages on an ongoing basis. This is a legitimate tax planning strategy for employees who want to reduce their California income tax burden. The FTB will scrutinize purported relocations closely, particularly if the employee continues to work primarily with California-based colleagues and continues to visit California frequently.
The Nexus Problem for California Companies
When a California company’s remote employees work from other states, those employees may create tax nexus for the company in those states — meaning the company may owe income tax in those states on income attributable to those employees’ activities. This is called “payroll factor nexus” — many states include payroll as a factor in determining how much of a multistate company’s income is attributable to that state.
A California company with a remote employee in New York may owe New York corporate income tax on income attributable to that employee’s activities, in addition to California franchise tax on California-source income, federal income tax on all income, and the employee’s New York payroll tax obligations. Multistate tax compliance is a genuine complexity that grows with each remote employee added in a new state. Model this before your remote hiring strategy compounds it.
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