Tax Consequences for Remote Workers Leaving California

Working from home is still a popular choice on the west coast. Discover what happens when California employees migrate out of the state where their company is located.

What you’ll discover:

How do taxes work if I relocate out of state and work for a company in another state?
What if I’m just relocating out of state for a short time?
How can I avoid paying taxes to two different states?
Is it a difference whether I’m an employee or an independent contractor if I wish to relocate but continue to work for the same California company?
Which states have the most favorable tax policies for remote workers?

After the COVID-19 outbreak, America saw a surge of suburban movement. When mortgage rates plummeted to record lows and professional sector occupations shifted to entirely remote work, millions of Americans relocated from pricey cities to bigger or less expensive houses in less densely populated locations. Devastating wildfires, heatwaves, and rolling blackouts prompted many remote workers to flee the state, particularly in California. Whether your leave is driven by safety or economy, even if your relocation is merely temporary, there may be tax implications.

How do taxes work if I relocate out of state and work for a company in another state?

Normally, this is determined by whether your transfer is permanent or temporary, as well as how you intend to justify it. You are eventually taxed on all income earned as a resident, as well as income earned in California as a part-year resident or nonresident. Every state you relocate to, even if just temporarily, may have an income tax obligation for anybody working there. As a result, you may be taxed by both your new state of residence and California.

If you can establish that you are no longer a California resident, you will only be taxed as a part-year resident for the months in which you were present. You are still a complete resident if your relocation is considered transitory and does not fulfill the safe harbor criteria.

What if I’m just relocating out of state for a short time?

Although around 20% of Americans have relocated or intend to relocate as a result of COVID-19 and the accompanying shift to remote employment, Pew Research forecasts that just 3% of these transfers will be permanent. Even if you want to return to California at some point in the future but are unsure when, you should make certain essential choices now if you want to avoid extra tax liabilities.

The California Franchise Tax Board will most likely analyze a variety of variables to determine whether you’ve really left the state or whether you have enough links in the state to be deemed a resident for tax reasons. For example, if you’ve relocated but still have a residence in California and possessions in storage, this might imply that you haven’t completely left the state. In other words, whether your transfer is permanent or temporary is determined by your own circumstances. The Franchise Tax Board determines these decisions on an individual basis.

Thus, if you’re intending to leave California and want to prove that you’re no longer a California resident for tax reasons, some behaviors that may demonstrate your departure is not transitory include:

Selling or terminating your lease.
Taking your possessions rather than storing them in California.
Get a new driver’s license in your new state.
Enrolling your children in neighborhood schools.
Getting registered to vote in your new state.
Participating in local social, civic, and professional organizations in your new state.

Even if your work or company follows you, you must demonstrate your permanency in order to avoid extra taxes from the state of California.

How can I avoid paying taxes to two different states?

If you relocate late in the year, you will almost certainly have to pay taxes to two states, since you will have two part-year state tax returns to worry with unless you reside in one of the seven states that do not have an income tax. If you foresee a substantial taxable item, such as a relocation bonus or stock sale, you may wish to change and claim your residence as soon as feasible, then timing the transaction to coincide with the end of your California residency. The seven states that do not impose personal income taxes are, by the way, as follows:

Alaska.
Florida.
Nevada.
The state of South Dakota.
Texas.
Washington.
Wyoming.

Is it a difference whether I’m an employee or an independent contractor if I wish to relocate but continue to work for the same California company?

Finally, it is determined by how you arrange your career and connection with the organization, as well as federal and state labor regulations. Independent contractors must pay their own taxes rather than having their company withhold and share the tax burden. Under California’s AB5, it is more difficult to prove that a worker is an independent contractor. But, in jurisdictions where the ABC test is not used, an independent contractor relationship may be simpler to establish and may free your employer of legal duty and tax costs.

If you desire to continue working, you must tell your employer of your new address so that your state tax withholdings are adjusted accordingly. If relocating out of state is still a concept rather than a reality, you should address your intention to continue working with your employer if you relocate. If you relocate, your employer will be subject to the new state’s labor regulations, which may or may not make them agreeable to this agreement.

Which states have the most favorable tax policies for remote workers?

States that simplify tax reporting across the board, such as Pennsylvania’s flat tax plan, or have no income tax, such as Florida or Nevada, have proved to be attractive remote worker locations.

Business-friendly states such as Florida, Alabama, and Nevada have also attracted freelancers and entrepreneurs looking for cheaper company taxes and administrative burdens. Multi-state and temporary residency are complicated tax issues. If you have nonresident and part-year residence tax concerns, see a lawyer.