CALIFORNIA SOURCE OF INCOME RULES under R&TC §17951 govern when a NONRESIDENT'S income is subject to California personal income tax. CORE RULE R&TC §17951: nonresidents are taxed only on "gross income from sources within this state." Where the nonresident lives, where the contract for services was entered into, or where payment is received does NOT determine source. SERVICE INCOME RULE - LOCATION OF PERFORMANCE: CCR §17951-5 (employees) and CCR §17951-4 (sole proprietors and business income) - California-source compensation is the portion of total compensation attributable to PERSONAL SERVICES PERFORMED IN CALIFORNIA. For employees, ratio of CA workdays to total workdays applies (analogous to NY allocation but without "convenience-of-employer" rule). NO CONVENIENCE RULE - California follows PURE PHYSICAL-PRESENCE sourcing for wages; days worked outside CA from out-of-state home for CA employer are NOT CA source days regardless of employer arrangement. CCR §17951-5 covers employee compensation; CCR §17951-8 (adopted following 2024 regulatory action) covers nonemployee director compensation. MARKET-BASED SOURCING for sole proprietor/independent contractor under CCR §17951-4 - revenue from services rendered FOR a CA-based business or to a CA market is CA source even where service performed outside CA. INVESTMENT INCOME R&TC §17952: nonresident-owned intangibles (stocks, bonds, royalties from intangibles, gains on stock) generally NOT CA source UNLESS the intangible has "acquired a business situs" in CA (used in CA business). Real property gains R&TC §17952(a) - CA-located real property always CA source. PARTNERSHIP/S-CORP K-1 income - apportioned at entity level by CA rules then passed through; nonresident receives share of CA-apportioned income. CALIFORNIA NONRESIDENT WITHHOLDING R&TC §18662 - 7% withholding required on certain CA-source payments to nonresidents exceeding $1,500 per year (services, rent, royalties from CA sources). Form 587 (Nonresident Withholding Allocation Worksheet), Form 590 (Withholding Exemption Certificate), Form 592 (Resident and Nonresident Withholding Statement). Form 540NR for nonresident return; California resident worldwide tax with §18001 OTHER STATE TAX CREDIT for taxes paid to other states by CA residents. R&TC §17041 - PERSONAL INCOME TAX IMPOSITION; nonresident tax computed as if resident then multiplied by CA-source / total-income ratio. CHIEF COUNSEL RULING 2019-03 clarified nonemployee director compensation sourcing. RETIREMENT INCOME - CA cannot tax nonresident retirement income (4 U.S.C. §114 federal preemption); R&TC §17952.5. CA DOES tax nonresident wages, business income, real property income from CA sources; CA's aggressive enforcement particularly on former CA residents.
Core rule R&TC §17951: Nonresident pays CA tax only on CA-source income. Source determined by where services performed (employees) or where market is located (sole proprietors/business income).
Employee wages CCR §17951-5: CA source compensation = total comp × (CA workdays / total workdays). Pure physical-presence sourcing. NO convenience-of-employer rule (unlike NY).
Self-employment/business CCR §17951-4: Market-based sourcing - CA source if services rendered to a CA-based business or CA market, even where work performed outside CA.
Investment income §17952: Generally NOT CA source for nonresident unless intangible has acquired "business situs" in CA. Stock sales by nonresident not CA source; CA real property always CA source.
Nonresident withholding §18662: 7% withholding on CA-source payments to nonresidents over $1,500/year; Form 587 allocation worksheet; Form 590 exemption certificate.
| §17951 Element | Detail |
|---|---|
| Authority | California Revenue and Taxation Code §17951 - nonresidents taxed on "gross income from sources within this state" |
| Cross-reference | R&TC §17041 imposes CA personal income tax; R&TC §17041(b) prescribes computation method for nonresidents |
| Computation method §17041(b) | Tax = (CA-source taxable income / total taxable income) × CA tax computed as if resident; effectively averages CA-source over total income |
| Source determination - NOT | Where nonresident lives, where contract entered, or where payment received does NOT determine source |
| Source determination - YES | Where personal services performed (employee); market location (business income); location of real property; location of business situs (intangibles) |
| Form 540NR | California Nonresident or Part-Year Resident Income Tax Return - nonresidents file this form |
| Schedule CA (540NR) | CA Adjustments - Nonresidents or Part-Year Residents |
| Schedule D (540NR) | California Capital Gain or Loss Adjustment - allocates capital gains/losses |
| Filing threshold | Nonresident files if CA gross income exceeds filing threshold (varies by year and filing status) |
| Top 2026 marginal rate | CA top rate 13.3% (12.3% top bracket + 1% mental health surcharge over $1M); among highest state rates nationally |
| CCR §17951-5 Element | Detail |
|---|---|
| Authority | California Code of Regulations, Title 18, Division 3, Chapter 2.5, Subchapter 11, §17951-5 |
| Basic rule | Wages of nonresident employees sourced based on where personal services are PERFORMED, not where employer is located |
| Allocation formula | CA source wages = total wages × (working days in CA / total working days) |
| Working days | Days actually worked; excludes weekends, holidays, sick, vacation, personal time |
| Part-day rule | Any part of a day worked in CA counts as a CA day (similar to NY); but unlike NY, the calculation favors actual physical presence |
| NO CONVENIENCE RULE | Critical distinction from NY - California uses pure physical-presence sourcing. Days worked outside CA from out-of-state home for CA employer are NOT CA source days, regardless of why employee works outside CA |
| Practical effect | Remote work for CA employer from out-of-state home generates ZERO CA source income (subject to other state's tax only) |
| Traveling salespersons §17951-5(a)(1) | Commissions allocated by ratio of CA sales volume to total sales volume |
| Performers and professionals §17951-5(c) | Other compensation arrangements apportioned to allocate CA portion reasonably |
| Retirement income exclusion §17951-5(d) | Qualified retirement income (R&TC §17952.5) excluded from CA source for nonresident (4 U.S.C. §114 federal preemption alignment) |
| Stock options - sourcing | Apportion based on workdays in CA during grant-to-vest period; similar mechanic to NY but without convenience rule overlay |
| Restricted stock - sourcing | Vesting-period CA workday ratio applied |
| Deferred compensation | Allocate based on services rendered during earning period; CA workday ratio in earning period |
| CCR §17951-4 Element | Detail |
|---|---|
| Authority | California Code of Regulations §17951-4 - business income of nonresidents |
| Business carried on in CA | Income from trade or business that has operations or activities in CA is CA source to extent of CA activities |
| Unitary business apportionment | If business operations span states, apply CA's market-based sourcing rules to determine CA portion |
| Market-based sourcing for services | Service revenue sourced where customer/market receives benefit; if CA customer/market, CA source |
| Proposition 39 (2012) | Adopted single sales factor for most CA business apportionment; market-based sourcing standard |
| Sole proprietor | Schedule C income from sole proprietor business with CA activities apportioned by market-based sourcing |
| Partnership/LLC K-1 | CA-source apportionment at entity level passes through to partners on K-1; nonresident partner taxed on CA-apportioned share |
| S-corp K-1 | Similar to partnership - CA-apportioned share passes through |
| Independent contractor / nonemployee director | CCR §17951-8 (adopted 2024 regulatory action) - market-based sourcing for nonemployee director compensation; Chief Counsel Ruling 2019-03 prior guidance |
| Pass-through entity tax (PTE) | CA AB 150 (2021) PTE elective tax - entity pays CA tax on behalf of partners/shareholders; nonresident gets CA credit at entity level |
| §17952 Element | Detail |
|---|---|
| General rule | Income from intangibles (stocks, bonds, royalties) of nonresident NOT CA source unless intangible has "business situs" in CA |
| Business situs definition | Intangible used as integral part of business carried on in CA; physically located in CA; or otherwise constitutes asset of CA business |
| Stock sale gains | Generally NOT CA source for nonresident; gain from sale of publicly traded stock by nonresident not CA source even where stock issued by CA corporation |
| Dividends from CA corporation | Generally NOT CA source for nonresident shareholder; dividends sourced to recipient's domicile |
| Interest income | Generally NOT CA source for nonresident; interest income sourced to recipient's domicile |
| Royalties | NOT CA source unless underlying intangible has business situs in CA |
| Real property gains §17952(a) | CA-located real property always CA source regardless of nonresident's status; sale of CA real estate triggers CA capital gain |
| Pass-through entity gain on CA real property | Sale of interest in partnership/LLC owning CA real property - look-through to underlying CA real property gain may be CA source per FTB position |
| Tangible personal property | Gains on CA-located tangible personal property generally CA source |
| Installment sale | Installment payments retain source of underlying gain; CA real property installment gain is CA source over collection period |
| §18662 Withholding Element | Detail |
|---|---|
| Authority | R&TC §18662 - withholding of CA income or franchise taxes from payments to nonresidents |
| Rate | 7% standard CA nonresident withholding rate on CA-source payments |
| Threshold | Total CA-source payments to nonresident must exceed $1,500 per calendar year to trigger withholding obligation |
| Subject payments | (1) Nonemployee compensation for services performed in CA; (2) Rent on CA real/personal property; (3) Royalties from CA natural resources; (4) Prizes/winnings from CA contests; (5) Other CA-source payments to nonresidents |
| Forms | Form 587 (Nonresident Withholding Allocation Worksheet); Form 590 (Withholding Exemption Certificate); Form 588 (Withholding Waiver Request); Form 592 (Resident and Nonresident Withholding Statement) |
| Form 590 exemption | Recipient certifies CA residency or other exemption to avoid withholding |
| Pass-through entity withholding | S-corps and partnerships withhold on distributions to nonresident shareholders/partners with CA-source income; subject to $1,500 minimum |
| Real estate withholding §18662(e) | Separate 3.33% withholding on sale of CA real property; reported on Form 593 |
| Backup withholding §18664 | 7% backup withholding on reportable payments (IRC §3406 analog) since January 1, 2010 |
| Withholding agent liability §18668 | Payer/withholding agent liable for unwithheld amounts; cannot recover from payee without separate action |
Facts: Anna is a Texas resident employed by SF-based tech company. 2026 base salary $250,000 plus $200,000 RSU vesting; total $450,000 W-2 income.
Anna works remotely from Austin, TX home. 2026 work breakdown:
- Total working days: 230
- Days physically in CA (offsite meetings, headquarters visits): 18
- Days working from Austin home: 200
- Days at company event in Las Vegas: 7
- Days at customer visits outside CA: 5
RSUs granted in 2024, vested in 2026 (24-month vesting period). During vesting period (24 months), Anna had 30 total CA workdays.
Step 1: Base salary CA allocation:
CA workdays: 18
Total workdays: 230
CA allocation ratio: 18 / 230 = 7.83%
CA source base salary: $250,000 × 0.0783 = $19,565
Critical: NO convenience-of-employer rule in CA. The 200 Austin home-office days are NOT CA-source even though Anna's employer is in CA. This is the major difference from NY.
Step 2: RSU CA allocation:
RSU sourced based on workdays during vesting period (grant to vest)
Vesting period 24 months, total workdays approximately 460
CA workdays during vesting: 30
CA allocation ratio: 30 / 460 = 6.52%
CA source RSU income: $200,000 × 0.0652 = $13,040
Step 3: Total CA source:
CA source: $19,565 (salary) + $13,040 (RSU) = $32,605
Total income: $450,000
Non-CA: $417,395 (taxed by TX = $0 since TX has no state income tax)
Step 4: CA tax computation §17041(b):
Compute CA tax AS IF resident on full $450,000 - approximately $40,000 (assume effective ~9% on full amount)
Multiply by CA-source ratio: $40,000 × ($32,605 / $450,000) = $40,000 × 0.07245 = approximately $2,898
CA nonresident tax: approximately $2,900
Step 5: Withholding:
Employer should withhold CA tax on the $32,605 CA-source portion only (not full salary). Form 587 from Anna to employer allocates CA-source portion; reduces over-withholding.
If employer over-withheld (treated all wages as CA source), Anna recovers excess via 540NR refund.
Contrast with NY:
If Anna's employer were NY-based instead of CA-based, NY convenience rule would treat 200 Austin home-office days as NY days (no necessity for out-of-NY work for NY employer). NY source would be approximately 230/230 = 100% × $450,000 = $450,000 NY source. NY tax approximately $40,000.
This illustrates why CA's no-convenience-rule approach is significantly more favorable to remote workers - $2,900 CA tax vs $40,000 hypothetical NY tax on same facts. Employer location matters dramatically.
If Anna had been CA resident before move to TX:
Anna's prior CA residency increases audit scrutiny. CA can challenge whether move was "genuine" or whether Anna remains CA domiciled. Domicile factors: home, business activity, time, near-and-dear items, family connections (similar to NY). CA also aggressive on residency audits for departing residents. Document the move thoroughly.
California does NOT have a convenience-of-employer rule. Remote work from out-of-state home for CA employer generates NO CA source income. Practitioner advising client to "allocate as if NY convenience rule applies" overstates CA exposure dramatically. CA follows pure physical-presence sourcing.
Source rules apply to nonresidents (R&TC §17951). Residency rules apply separately - CA resident is anyone whose CA presence exceeds 9 months presumption or who is domiciled in CA. Practitioner not testing residency separately may miss full-CA-tax exposure for resident classifications.
§17952 - intangible income generally not CA source for nonresident. Practitioner treating publicly traded stock sale as CA source because issuer is CA corporation misapplies. Need "business situs" of intangible in CA to source.
Same principle - generally NOT CA source for nonresident absent business situs. Practitioner over-allocating investment income exposes client to unnecessary CA tax.
Sale of interest in partnership owning CA real property - FTB position is to look through to underlying CA real property gain as CA source. Practitioner treating gain on entity interest as pure intangible (non-CA source) may misapply if entity is primarily CA real estate holding.
Nonresident payee should provide Form 587 (Nonresident Withholding Allocation Worksheet) to withholding agent to allocate non-CA portion. Practitioner not filing Form 587 leaves payee subject to 7% withholding on full payment.
Form 593 real estate withholding is SEPARATE from §18662 7% withholding. 3.33% applies to sale of CA real estate; 7% applies to other CA-source payments. Practitioner confusing rates misapplies.
AB 150 PTE elective tax allows entity to pay CA tax on behalf of owners. Nonresident owner gets CA credit; PTE deduction reduces federal income subject to SALT cap. Practitioner not evaluating PTE election leaves SALT cap workaround on table.
Pre-2024, nonemployee director compensation sourcing was ambiguous; FTB applied CCR §17951-5 to directors despite being for employees. CCR §17951-8 (adopted 2024) clarifies market-based sourcing for nonemployee directors. Practitioner using employee rule for directors misapplies.
4 U.S.C. §114 preempts state taxation of nonresident pension income; CA R&TC §17952.5 conforms. Practitioner including former-CA-employee's pension as CA source post-move misapplies preemption.
Allocate based on grant-to-vest CA workdays - not exercise year. Practitioner allocating based on exercise location misallocates.
Similar to options - allocate based on CA workdays during vesting period. Practitioner sourcing entire RSU to vesting year residence may misallocate when vesting period spans multiple residency periods.
Allocate bonus based on CA workdays during EARNING period (typically prior year for year-end bonus). Practitioner sourcing bonus to payment year residency misapplies.
Special rules for performers, athletes, entertainers; CA aggressive on game/performance day sourcing. Practitioner advising athletes must check special rules under CCR §17951-5 and FTB guidance.
Withholding agent failing to withhold liable for unwithheld amounts §18668. Practitioner advising payer to skip withholding for "small" payments exposes payer to liability if total CA payments exceed $1,500 threshold.
CA's FTB aggressive on former residents claiming nonresidency. Similar 5-factor domicile analysis. Practitioner not preparing documentation for former CA residents leaves client vulnerable to multi-year residency audit.
Nonresident tax computed AS IF resident on full income, then multiplied by CA-source ratio. Practitioner applying CA tax rates directly to CA-source income (without the as-if computation) may misstate tax. Method increases effective rate because CA-source slice taxed at higher marginal rate that would have applied to total.
CA residents get §18001 credit for taxes paid to other states. Nonresident pays only CA on CA source; resident state may give credit. Practitioner not coordinating multistate credit may double-tax client.
Primary authority: California Revenue and Taxation Code §17041 (imposition of CA personal income tax). §17041(b) (nonresident computation method - tax as if resident times CA source ratio). §17951 (nonresidents taxed on CA source income). §17952 (intangibles - generally not CA source unless business situs). §17952(a) (CA real property always CA source). §17952.5 (qualified retirement income excluded from CA source for nonresident). §18001 (resident credit for taxes paid to other states). §18662 (nonresident withholding requirement). §18662(e) (real estate withholding). §18664 (backup withholding under IRC §3406 analog). §18668 (withholding agent liability). §18669 (penalty for failure to withhold). 4 U.S.C. §111 (federal employment compensation). 4 U.S.C. §114 (federal Source Tax Act 1996 - nonresident pension preemption). California Code of Regulations, Title 18 Division 3, Chapter 2.5, Subchapter 11. CCR §17951-1 (definitions). CCR §17951-2 (specific items of income). CCR §17951-4 (income from business operations - nonresidents and market-based sourcing). CCR §17951-5 (wages, salaries, and other compensation for personal services performed in CA). CCR §17951-5(a)(1) (traveling salespersons commissions). CCR §17951-5(c) (performers and professionals - apportionment). CCR §17951-5(d) (retirement income exclusion). CCR §17951-8 (nonemployee director compensation - adopted 2024). FTB Pub. 1017 (Resident and Nonresident Withholding Guidelines). FTB Pub. 1100 (Taxation of Nonresidents and Individuals Who Change Residency). FTB Pub. 1031 (Guidelines for Determining Resident Status). FTB Chief Counsel Ruling 2019-03 (nonemployee director compensation sourcing). FTB Legal Ruling 1954-123 (services not performed in CA - not CA source). FTB Legal Ruling 2006-1 (interpretation of source rules). California Assembly Bill 150 (2021) (Pass-Through Entity Elective Tax). Proposition 39 (November 2012 - single sales factor apportionment for business income). Form 540NR (California Nonresident or Part-Year Resident Income Tax Return). Form 540NR Schedule CA (CA Adjustments - Nonresidents/Part-Year). Form 540NR Schedule D (Capital Gain or Loss Adjustment). Form 587 (Nonresident Withholding Allocation Worksheet). Form 588 (Nonresident Withholding Waiver Request). Form 590 (Withholding Exemption Certificate). Form 592 (Resident and Nonresident Withholding Statement). Form 593 (Real Estate Withholding Statement). Form 3804 (Pass-Through Entity Elective Tax Calculation). Form 3804-CR (Pass-Through Entity Elective Tax Credit). Form 3893 (Pass-Through Entity Elective Tax Payment Voucher).