California nonresident taxes

California taxes nonresidents only on income sourced to California, not on worldwide income. If a person lives outside California but earns certain types of California‑source income, that income is subject to California personal income tax and generally requires filing a nonresident return (Form 540NR).

Overview of California Nonresident Taxation

California distinguishes between residents, part‑year residents, and nonresidents. A nonresident is taxed only on income derived from California sources, whereas a resident is taxed on all worldwide income regardless of where it is earned. See Cal. Rev. & Tax. Code § 17951.

According to the California Franchise Tax Board guidance, nonresidents must pay tax on taxable income from California sources, which can include employment income earned in the state, business income from California activities, and income from California real property.[1]

What Counts as California‑Source Income

Common categories of income taxable to nonresidents include:

• Services performed in California (e.g., wages for work physically done in California).[1]
• Income from a California business, trade, or profession.[1]
• Rent from real property located in California.[1]
• Gain from the sale or transfer of California real estate.[1]
• Installment payments or gains tied to California property or activities.[2]

For example, if a person lives in Texas but travels to California to perform work, the wages attributable to the work performed in California are California‑source income and subject to California tax.[1]

Remote Work and Out‑of‑State Residents

When a person relocates outside California but continues working for a California employer, the sourcing of income depends on where the services are actually performed.

• If work is performed in California, the wages are taxable by California.[1]
• If work is performed entirely outside California, the wages generally are not California‑source income, unless special rules apply (such as deferred compensation tied to California work).[1]

Independent Contractors and Businesses

For independent contractors, California may determine source income based on where the customer receives the benefit of the service, not necessarily where the work is physically performed.[1]

Additionally, payments of California‑source income to nonresidents may be subject to withholding requirements. California law generally requires withholding of 7% on certain non‑wage payments exceeding $1,500 made to nonresident payees.[3][4]

Filing and Tax Calculation for Nonresidents

Nonresidents generally file California Form 540NR. The tax is calculated using a proration formula:

• California determines tax as if the taxpayer were a full resident.
• The tax is then applied proportionally to the California‑source portion of total income.[2]

This formula effectively ensures that the taxpayer’s tax rate reflects total income, while only the California‑source portion is taxed.[2]

Double Taxation Relief

If the same income is taxed by both California and another state, taxpayers may qualify for the Other State Tax Credit, which offsets taxes paid to the other state.[5]

Key Takeaway

A nonresident does not pay California tax on all income—only on income connected to California (work performed there, property located there, or business activity there). Filing is typically required if California‑source income exists.