There are many tax issues that surround non-resident compensation for personal services performed in California. Depending on the exact situation, there are different tax rules that apply.

A frequent question is what constitutes California personal services income (i.e., wages) for an individual who is not a resident of California. The answer to that question generally depends on whether the services were performed in California (18 CA Reg § 17951-5). Thus, if all the services were performed in another state, none of the income is taxable to CA.

Example #1 - If a CA nonresident employee provides services to a CA resident or CA entity, but all of those services were performed outside of CA, the income for those services is not taxable to CA. Instead, they are taxable to the state where the services were performed assuming that state has a personal income tax.

Example #2 – If a nonresident individual travels to CA and performs services in CA, the compensation for services he or she performs within CA are taxable to CA. Thus, his or her gross income will be allocated and apportioned between CA and other states where the individual has performed services. CAUTION: Where an individual has a workplace both in and outside of CA and provides services to CA residents or CA entities both in the CA workplace and the out of state workplace, the proration burden of proof will lie with the individual and the allocation might be a hard hill to climb.

Example #3 - Where an individual who is not a CA resident is employed in California at intervals during the year, compensation received for personal services includes that portion of the total compensation for personal services which the total number of working days employed within CA bears to the total number of working days both within and without CA. (R&TC Regs Sec 17951-5(b))

California source income for independent contractors/sole proprietors is determined by looking to 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.

Example - James, a sole proprietor who prepares tax returns relocates from California to another state. In addition to obtaining clients in his new state, James still performs services for his California clients who receive the benefit of his services in California, even though James does all of the return prep work while in the new state. James will include the income he received from the California clients on his non-resident California return.