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xaviermerino
Level 1

Employee Withholding California - 100% Remote Non-Resident

Hello!

 

I'm trying to figure out whether I should be exempt from California income tax withholding or not. I am a Florida resident and being hired as a temporary, 100% remote, never set foot in California, employee. I found this website that mentions that I should not pay income taxes in California but I'm not sure if the information is right. They mention that:

 

the "source rule" means that the income is taxable if its coming from California regardless of the taxpayer's residency. But that 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. 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.

But 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. Remember, the income sourcing is determined by the location where the employee services are actually performed, not the location of the employer. A nonresident programmer who monitors and upgrades satellite dish software for a Los Angeles-based media company, all while sitting comfortably in front of his computer in his Austin, Texas condo, doesn’t earn California-source income and doesn’t have to pay California income taxes, as long as the work is performed outside of California.

 

Later on they mention:

 

At the employer end, while California companies have to withhold state payroll taxes for resident employees wherever they perform their services, and for nonresident employees for services in-state, this is not the case for nonresident employees who perform services outside of California.

 

I ask this because I was filling a DE-4, California's Employee Withholding Allowance Certificate, and wanted to make sure that I can check that I qualify for withholding exception. I read in the 2022 California Employer's Guide (page 16) where it details a table of of wages paid to non-residents of California (I've put in bold the portion that applies to me):

 

IfThen

A nonresident employee performs all services in California (may include spouse of a military service member).

The wages paid to the nonresident employee are subject to California PIT withholding. The PIT must be withheld from all wages paid in accordance with the employee’s
DE 4. However, the spouse of a military service member may exclude
wages from California PIT withholding by marking the corresponding box when filing a DE 4. Refer to the withholding requirements on page 13.

The wages paid must be reported as PIT wages on the DE 9C. The PIT withheld must also be reported on the DE 9C.

A nonresident employee performs services both in California as well as in another state.

Only the wages earned in California are subject to California PIT withholding. The amount of wages subject to California PIT withholding is that portion of the total number of working days employed in California compared to the total number of working days employed in both California and the other state.

The California wages must be reported as PIT wages on the DE 9C. The PIT withheld must also be reported on the DE 9C.

NOTE: For employees whose compensation depends on the volume of business transacted, the amount of earnings subject to California PIT withholding is that portion received for the volume of business transacted in California compared to the total volume of business in both California and the other state.

 

 

Therefore, I think that I qualify for marking that exception. After all, since it is a 100% remote work, all of my wages would be earned for work performed outside of California. Would I be correct?

1 Best answer

Accepted Solutions
pk
Level 13
Level 13

Employee Withholding California - 100% Remote Non-Resident

@xaviermerino  your conclusion that your income being paid by a California entity is to sourced  to your resident state where the work is performed.  The same doctrine is followed by the feds -- income sourced to where the work is performed.

 

Is there mor I can do for you ?

View solution in original post

3 Replies
pk
Level 13
Level 13

Employee Withholding California - 100% Remote Non-Resident

@xaviermerino  your conclusion that your income being paid by a California entity is to sourced  to your resident state where the work is performed.  The same doctrine is followed by the feds -- income sourced to where the work is performed.

 

Is there mor I can do for you ?

xaviermerino
Level 1

Employee Withholding California - 100% Remote Non-Resident

So just to clarify, I can claim the exemption to withholding since this my assumption is correct. Right?

pk
Level 13
Level 13

Employee Withholding California - 100% Remote Non-Resident

Correct.

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