Jonah Patel
California state taxes its residents on all of their income, including income acquired from sources outside the state. Nonresidents are also subject to California income tax, but only on their California-source income. California source income for independent contractors/sole proprietors is determined by looking at where the benefit of the service is received by the customer, rather than where the work is performed. Nonresidents may be taxed on any income from a business, trade, or profession carried out in the state. In addition, income from partnerships, S-Corporations, and trusts are taxed to nonresidents if it comes from sources within the state.
| Characteristics | Values |
|---|---|
| Taxation of California residents | Taxed on all income, including income acquired from sources outside the state |
| Taxation of non-residents | Only taxed on California-source income |
| California-source income for non-residents | Income from services performed in California, regardless of the location of the employer or employee |
| California-source income for independent contractors/sole proprietors | Determined by where the benefit of the service is received by the customer, not where the work is performed |
| California-source income for non-residents with a business, trade, or profession | Taxed on income generated from business conducted within California |
| California-source income for non-residents with a business, trade, or profession conducted entirely outside of California | Not taxed |
| California-source income from real estate sales | Determined by the location of the property |
| California-source income from stocks and bonds | Determined by the residency of the taxpayer at the time of the sale |
| California-source income from retirement income | California does not tax retirement income received by a non-resident after December 31, 1995 |
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What You'll Learn
Non-resident tax rules
California taxes its residents on all of their income, including income acquired from sources outside the state. Nonresidents are also subject to California income tax, but only on their California-source income.
California source income for independent contractors/sole proprietors is determined by looking at where the benefit of the service is received by the customer. The location where the independent contractor/sole proprietor performs the work is not a factor.
If you are a nonresident with a business, trade, or profession that conducts business both within and outside California, the income generated from business within California is California source income and is taxable in the state.
Nonresidents may be taxed on any income from a business, trade, or profession carried out in the state. In addition, income from partnerships, S-Corporations, and trusts are taxed to nonresidents if it comes from sources within the state.
If you are a nonresident of California and hold a partnership interest in a California partnership, your distributive share of partnership net income has a source in California and is taxable by California.
If you are a California nonresident, you will not pay California tax on income from stocks, bonds, notes, or other intangible personal property unless the property is located in California.
California does not tax retirement income received by a California nonresident after December 31, 1995. This includes IRA distributions, SEPs, Keoghs, Roth IRAs, and qualified annuities.
If you are a part-year resident, you pay tax on all worldwide income while you were a resident of California.
If you are domiciled in California but are outside of California under an employment-related contract, you may qualify as a nonresident under safe harbor.
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Independent contractors and sole proprietors
If an independent contractor or sole proprietor is a non-resident of California for tax purposes, they are still subject to California state income tax on income derived from California sources. California-source income for non-residents includes wages and salaries for services performed in California, and income from partnerships, S-Corporations, and trusts within the state. Additionally, if an individual has a spouse who is a California resident, their income is considered community property and the non-resident spouse must pay California tax on their share of that income.
To calculate the portion of their income that is California-sourced, independent contractors and sole proprietors can multiply their total income for the year by a ratio of the number of days they performed services in California to the total number of days they performed services worldwide.
It is recommended that independent contractors and sole proprietors save around 25%-30% of their earnings to pay their taxes, as the more they earn, the more tax they will need to pay. Tax calculators, such as the TaxAct Self-Employment Calculator, can be useful tools for estimating tax liability and planning for tax payments.
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Retirement income
California has a reputation for being a costly state to live in, with a high cost of living and some of the highest sales taxes in the US. It also has the highest marginal income tax rate in the country. However, when it comes to retirement income, California has some benefits.
Firstly, California does not tax retirement income received by a California nonresident after 31 December 1995. This includes IRA distributions, SEPs, Keoghs, Roth IRAs, and qualified annuities. However, if you are a California resident, you will be taxed on all income, including retirement income, except for Social Security retirement benefits. This means income from retirement accounts and pensions is fully taxed at some of the highest state income tax rates in the country.
If you are a part-year resident of California, you will be taxed on all worldwide income while a resident of the state. For the period of time that you were a nonresident, you will be taxed only on your California source income. California source income is determined by where the benefit of the service is received by the customer, not by the location where the work is performed. For example, if you are a nonresident of California but provide a service to California-based businesses, this is deemed California source income and is taxable by California.
Additionally, California has a progressive (or graduated) tax system, meaning that different proportions of income are taxed depending on the income amount. This can range from 1% to 13.3%. It's important to note that California also has a capital gains tax, so any capital gains, including long-term gains, are taxed as ordinary income.
Overall, while California may have a high marginal tax rate, there are other factors to consider when planning for retirement, such as the stable property taxes, no taxes on social security benefits, and the potential for lower taxes for those with incomes under $100k.
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Business income
California taxes its residents on all of their income, including income acquired from sources outside the state. Nonresidents are also taxed on their California-source income. This includes nonresidents with a business, trade, or profession that conducts business both within and outside California; the income generated from business conducted within California is California source-income and is taxable in the state.
For example, a nonresident who runs a business or performs services entirely within the state will have to pay taxes for income derived from that work. However, if a non-resident operates a business or performs their trade entirely outside of California, any income derived from that work will not be taxable.
California nonresidents are taxed on their California-source income, which includes income from partnerships, S-Corporations, and trusts. Nonresidents may also be taxed on income from estates or trusts if any intangible property held in that estate or trust has established a business situs in California.
Additionally, nonresidents may be taxed on gains and losses from stocks and bonds if the property has its business situs in California or if they regularly, systematically, and continuously buy and sell such property in the state.
It's important to note that California taxes all taxable income with a source in California, regardless of the taxpayer's residency. This means that nonresidents who perform services in California will be taxed on the income from those services, even if they never worked out of a California branch or office, and even if the wages are paid outside of California.
In the case of nonresidents receiving benefits for their work performed in California, they will have to pay taxes on those benefits in the state. The tax liability is determined through calculations that take into account the company's income in California and other jurisdictions during the periods the individual was and was not a resident.
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Real estate sales
California is often regarded as a high-tax state, but its real estate-related taxes are said to be more middle-of-the-road. When transferring a home in California, the seller usually pays the tax, but this can be negotiated during the transaction. If the tax is unpaid by the time the sale goes through escrow, the buyer is responsible for paying it.
In California, real estate agents are typically paid through commissions on property sales, rather than an hourly wage or salary. This means that their income is dependent on the number of sales they close, the commission rate, and the average property value in the area they work in. For example, the average single-family home in Los Angeles is around $650,000, whereas Oxnard's median home value is around $330,000. As such, it could take twice as many sales in Oxnard to match the salary of a real estate agent in Los Angeles. Real estate brokers, who have a higher level of licensing and more responsibilities, tend to earn higher incomes than agents.
If you are a non-resident of California with a business, trade, or profession that conducts business both within and outside of California, any income generated from business conducted within California is considered California source income and is taxable in the state. This includes gains or losses from the sale of California real estate. California residents are taxed on all of their income, including income acquired from sources outside the state. Non-residents are taxed only on their California source income.
If you are a non-resident who has left the state or has never lived in California but has financial ties to the state, you are still subject to California state income tax on income derived from California sources. This includes wages and salaries for services performed in California, regardless of the location of the employer or employee, or where the payment was issued. If you are a non-resident sole proprietor providing services to California businesses, this income is also taxable by California, even if you never worked in California.
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Frequently asked questions
It depends. If you are a nonresident and all services were performed outside of California, this would not be California-sourced income. However, if you had "deferred" or equity-based compensation, you may still have California-sourced income.
If you are a nonresident of California, you will be taxed on your California-sourced income. This includes income from services performed in California, regardless of the location of the employer or where the payment was issued.
California source income for nonresidents is calculated by multiplying the total income for the year by a ratio of the total number of days performing services in California over the total number of days performing services worldwide.
California source income for independent contractors/sole proprietors is determined by where the benefit of the service is received by the customer, not by where the work is performed.
California does not tax retirement income received by a California nonresident after 31 December 1995. This includes IRA distributions, SEPs, Keoghs, Roth IRAs, and qualified annuities.
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