I am active duty and I am stationed in PA. My wife and I have been legally married for a number of years. We are both residents of PA. My wife took a job working remotely for a company based in CA. Under CA law she received "...income for services which benefited a business or individual in California..." so we would have to file a non-resident return. Her employer did not withhold any state taxes. We made estimated tax payments to PA throughout the year to cover the income she received.
Am I correct that we are not covered under the MSRRA because we don't meet the provision, "The spouse is in California solely to live with the servicemember" since she is working there remotely?
Therefore, her income is taxable in CA and we report all the income she received from that company to CA and pay taxes on it less the credit from the tax we already paid for that income to PA?
Yes, you are correct that MSRRA does not apply.
Her income was not earned in California. It was earned in Pennsylvania.
File a California non-resident return and state that zero percent of the income was earned in California. Then all of that money will be refunded.
File a Pennsylvania return that shows the income was earned in Pennsylvania and pay the Pennsylvania state taxes. There is a supreme court ruling that two states cannot tax on the same income. State income taxes are paid to the state where you reside.
Your wife can complete and submit the California Exempt from Withholding form so that California Taxes will not be withheld in 2021 and you will not need to file a California return next year.
Is your wife an independent contractor (her income is reported to her on a 1099-NEC or 1099-MISC), or a W-2 employee?
If she is an independent contractor and she is providing services to a client located in CA, then her income from those services is taxable by CA.
If she is a W-2 employee who works exclusively from a location outside CA, then her income as a CA non-resident is not taxable by CA.