The modern workforce has been transformed by remote jobs. Increasingly, developers, designers, consultants, and startup workers are becoming location independent, logging in from the mountains, to the beach, or even a customized Sprinter van that rolls across the country.
However, state tax officials haven’t been as flexible. California’s aggressive sourcing rules may present a tax surprise for those who work for an employer in California.
Whether you’re traveling for weeks or even months, coding from Utah and attending Zoom meetings from Mexico, or anything in between, knowing where your income is taxed is key. Always rely on professionals (like a tax lawyer in Encino) for any kind of tax help.
A Strategic Move by the State of California to Identify and Tax Source Income
California taxes residents’ income from around the world. Nonresidents, however, generally are only taxed on income earned in California.
The problem is when it comes to figuring out exactly what constitutes California-source income.
Many remote workers believe that if they actually provide their services outside of California, then they are not subject to California taxation. The actual situation can be more complicated, though.
Some important factors that may be taken into account are:
- The location where the employee provides services.
- If the worker lives in California, he or she will stay a resident of California.
- The employer’s location.
- The conditions of the work contracts.
- If stock comp or bonuses are involved.
One of the most powerful indicators for traditional wage earners is physical presence. If you actually work and/or reside outside of California, then a portion of your compensation may not be considered California-sourced.
The “Benefit of the Work” Confusion
In relation to remote workers, they often get references to the phrase “where does the benefit of the work go?
This can be confusing because it’s not the same standard in each state.
Some states rely on employer convenience rules or market-based sourcing techniques that may be able to tax income when jobs are performed in other states. Look for a tax expert (similar to a Fresno tax attorney) who can guide you properly.
A general rule is that California pays strong attention to the location of the work for a wage earner, but for the following groups, it becomes more complicated:
- Independent contractors.
- Equity compensation.
- Deferred bonuses.
- Partnership interests.
- Owners of companies that offer services.
If a software engineer works on software projects in Utah but continues to live in California, he may still be taxed on all income in California due to his residency status.
On the other hand, if an individual establishes his or her residence in California in an appropriate manner and conducts all services outside of California, he or she may have a more solid claim for minimizing California tax liability.
Avoiding Double Taxation
A digital nomad can easily fall into a tax trap in several countries.
Potential issues include:
- Filing in temporary work sites.
- California residency audits.
- Issues of homelands and permanent residence.
- Issues related to the taxation of stock options and restricted stock units.
- Payroll withholding mismatches.
You could have other reporting requirements and treaty considerations if you are a remote worker from an international location.
Tips for Remote Workers
To avoid tax surprises, planning is essential.
Maintain Detailed Travel Records
- Keep documentation showing:
- The number of days spent at each site.
- Lease agreements or campground reservations.
- Utility bills.
- Uses GPS when available.
- Tickets and receipts for air travel.
Ensure Residency Status is reviewed annually
Sometimes, a living place is more significant than transience patterns. Having moderate ties to the Golden State and claiming nonresidence can bring unwanted attention from the Golden State.
Gain a Fundamental Understanding of Equity Compensation Rules
Stock options, RSUs, and performance bonuses may come with different formulas of compensation than regular wages.
Work With a Multistate Tax Professional
The nature of the work-at-home environment is changing more quickly than some taxpayers realize. A tax advisor who has experience with the residency home rule audit and multistate taxation can help avoid costly errors.
Working from a Sprinter van in Utah or a café by the sea in Mexico comes much closer to becoming a reality than ever before. But California tax principles still stand on the specifics of their sourcing and residency analyses. The freedom to move is not necessarily the same as freedom from tax for tech nomads. Documentation and planning may be the biggest defense against an unexpected tax bill.
