Remote work has been on the rise ever since 2020 and the COVID pandemic. Many individuals went back to an office after it was deemed safe to do so, others took their employment virtual and remained remote workers. While many employees now work from anywhere, California has not relaxed its residency rules. In fact, California residency audits have become more common as remote workers move out of state while maintaining economic or personal ties to California. Let’s look at what remote workers may face with a California residency audit and what virtual employees need to know about remote work.
A California residency audit is when the state determines that you are a resident of the state and, as such, subject to the state’s income tax. The state of California has three classifications for an individual: resident, non-resident, and partial-year resident. According to the Franchise Tax Board (FTB), you are a California resident if you meet any of the following criteria: present in California for other than a temporary or transitory purpose; or domiciled in California, but located outside California for a temporary or transitory purpose. A non-resident is any individual who is not a California resident, and a part-year resident is any individual who is a California resident for part of the year and a non-resident for part of the year (e.g., someone who lives in both California and Nevada).
I’ve received many questions from tax payers about why California focuses so much on resident audits. California is one of the most desirable places to live in the United States. But, it also has a very high cost of living and high income tax (the highest individual income tax rate is 13.3%). The FTB and its residency audits are there to protect tax revenue. And from the FTB’s perspective, remote work creates opportunities for taxpayers to claim they are non-residents while possibly still benefiting from California-based employment benefits and connections.
Remote work complicates the question of California residency because physical presence alone in the state no longer tells the full story. It’s important to keep in mind that working remotely from another state does not automatically make you a non-resident for California tax purposes. The FTB closely examines whether a move was temporary or permanent—and whether the taxpayer truly severed California ties.
Common scenarios that raise residency questions include moving out of California but continuing to work full-time for a California-based employer. They also may question if you are splitting time between California and another state, as well as leaving California temporarily with the intent to “see how it goes” before making an actual residency move. Additionally, maintaining a California home while renting or purchasing property elsewhere could raise a residency audit red flag.
If you are a remote worker, here are a few suggestions to avoid risking a residency audit. First, you must clearly establish residence in your new state and you must document that physical presence with detailed records. This may include utility bills, updating your driver’s license, voter registration and vehicle registration. You also want to move your financial and professional and relationships out of California and file consistent and accurate state tax returns.
If you are a remote worker facing a California residency audit,
California does not mess around with residency audits. If you are a remote worker, or you’re unsure whether you are a resident, non-resident or partial-year resident, it’s best to speak with an experienced California tax attorney who can help you navigate the FTB on your behalf and handle your California residency audit.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
