Key Takeaways
- One remote employee can create California remote work nexus and trigger state tax obligations, including income/franchise tax, payroll withholding, and unemployment insurance.
- California enforces nexus aggressively, with broad “doing business” rules, strict audit policies, and a minimum franchise tax even if your company has no net income.
- Common mistakes include assuming incorporation location protects you or failing to register with the Franchise Tax Board, both of which can lead to penalties and audits.
- Practical compliance steps: Track employee work locations, register promptly once nexus is established, update payroll for California withholding, and plan for potential multi-state taxation.
- Work with tax professionals to reduce risks, avoid double taxation, and design efficient compliance strategies.
Remote and hybrid work are here to stay, if not spread. After 2020, the rise of remote employees created new tax challenges. One of the biggest is the California remote work nexus, where even a single employee working from the state can create a taxable presence for your business.
So how do you navigate this? In this blog, we’ll guide you through the implications of creating nexus in California through remote workers. We’ll also help you ensure that if this is the case, your business is compliant with any tax regulations, and that you’re armed with the info you need to create an effective tax strategy.
What Is Tax Nexus?
Nexus is the legal connection that lets a state tax or require registration from an out-of-state business. If your company is considered to be “doing business” in California, it can face a number of tax obligations. These include income/franchise tax obligations, payroll and withholding requirements, unemployment insurance and payroll tax filings, and other registration duties. If your business doesn’t register or withhold where required, it’ll cost you, through penalties, back taxes, and interest.
A simplified way to think of nexus is that it’s a trigger. When your business activities in a state meet the nexus threshold, various state tax obligations activate. But there are different ways this could happen.
Previously, nexus was mainly grounded in physical presence. But in modern tax law, economic or factor presence has become equally (or more) important.
So what is physical presence nexus? There are several triggers, which usually trigger sales tax obligations. These include having a brick-and-mortar office, warehouse, or facility, owning or leasing real property, or maintaining inventory in state. It also includes having employees, contractors or agents physically present in the state doing business there. Basically, if you’re an out-of-state business with a remote employee working from California, your employee is considered to be physically present in the state. That presence is a nexus trigger.
And then there’s economic nexus, based on your business activities. Because commerce increasingly happens without physical footprints (via the internet, remote employees, or digital services), states have evolved to use economic nexus or factor presence nexus models. This is triggered by a certain volume of sales, transaction counts, or other economic activity in a state, even if your business doesn’t have any physical presence there.
Why California Remote Work Nexus Rules Are Stricter Than Other States
California is widely seen as one of the more aggressive states in enforcing nexus rules. And there are a few reasons behind that:
- Broad concept of “doing business”: According to the California Franchise Tax Board (FTB) and Revenue & Taxation Code, even if your business does not own property or maintain an office in California, it may still be deemed “doing business” if it exceeds thresholds relating to sales, payroll, or property.
- Economic nexus thresholds for sales or use tax: For these taxes, California requires registration and remittance if an out-of-state seller’s sales of tangible personal property into the state exceed $500,000 in the current or prior year. And for income or franchise tax nexus, the state uses a “factor presence” test. This looks at your in-state property, payroll, or sales exceeding certain thresholds.
- Strict audit and enforcement policies: California tax authorities are proactive in audits and state multistate examinations. Because it’s a large economy with high revenue potential, tax agencies often target noncompliant taxpayers with out-of-state operations.
- Volume of commercial activity and complexity: Given the size of the California market and volume of commerce, it’s easy to cross thresholds (or come close). The state also frequently updates its tax rules and guidance, so staying compliant is pretty demanding.
- California’s corporate and franchise taxes: Every corporation that is incorporated, registered, or “doing business” in California must pay a minimum franchise tax. This is true even if it has no net income. If your company is subject to tax, it must apportion its multistate income to California using California’s apportionment rules (based on California’s share of property, payroll, sales).
Triggers for Different Tax and Payroll Obligations
When California remote work nexus is established, various obligations may follow. These are summarized in the table below.
| Tax / Obligation | Triggered because | What you must do |
| Corporate Income and Franchise Tax | California defines “doing business” to include operating via employees in state or exceeding thresholds of sales, property, or payroll. | Register with California, file income/franchise tax returns, apportion income, and possibly pay minimum franchise tax. |
| State Payroll Withholding and Income Tax | The employee’s wages are sourced to California, where services are performed. | Withhold California state income tax, file state withholding returns, remit withheld amounts to the state. |
| Unemployment Insurance and Payroll Taxes | Most states require registration and contributions for unemployment insurance where employees work. | Register as an employer in California for unemployment, disability, and related state-level payroll taxes. |
| Sales or Use Tax (indirectly) | While remote employees don’t always trigger sales tax nexus, their presence may strengthen California’s argument that your business has a physical presence. | In certain cases, you may need to register for a California seller’s permit or collect use tax depending on goods or services sold. |
Is Your Business Making Mistakes Around Compliance?
If your business doesn’t comply with California remote work nexus tax obligations, it can lead to a variety of penalties, interest, and criminal risk. That’s why it’s important to avoid some of the most common mistakes made by many companies.
Like assuming you don’t have a presence in the state because you’re not incorporated there. Many business owners think “if I’m not a California corporation, I can’t be taxed there”. That’s not true. Nexus and doing business are independent of where you are incorporated. California’s tax law focuses on activities, not just legal form or incorporation.
You may also fail to register with the California Franchise Tax Board (and other agencies). Without registration, your business can’t properly file returns, pay the minimum franchise tax, withhold taxes, or be compliant. This means you may lose access to possible abatement or voluntary disclosure benefits, and be exposed to audit or enforcement action.
California has strict audit and enforcement policies. Some of the common audit triggers in the state include missed or late minimum franchise tax payments. Also consider discrepancies between federal and California return figures, high ratios of exempt sales, sudden shifts in revenue, or misclassifications.
And then there’s the pitfall of ignoring double taxation issues. If your firm operates in multiple states (including via remote employees), it’s possible that more than one state claims taxing rights over the same income or activities. Without careful planning, you might end up paying tax (or face compliance burdens) in multiple jurisdictions on overlapping bases.
We can help you!
Not sure how to navigate creating a taxable presence in California? Below are a few tips:
- Track your employee work locations. Use tools that monitor their locations, such as time-stamped login records, IP addresses, and GPS data, to ensure accurate reporting. Also mandate that employees inform HR of any changes to their work location, including temporary assignments or travel.
- Register promptly when establishing nexus: Hiring an employee in California or having them work remotely from the state can establish nexus. That means you’ll need to register for income/franchise taxes, payroll taxes, and sales or use taxes. Also remember to update your payroll systems for California withholding.
- Consult with tax professionals to minimize the risks: Tax experts like Fusion CPA can easily help you identify where your business has tax California remote work nexus obligations and ensure compliance. We can also create strategies that minimize your tax liabilities and streamline your compliance processes.
If you’re unsure how the California remote work nexus impacts your business, our tax professionals can help you navigate compliance and avoid penalties. Schedule a free Discovery Call with our team today.
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This blog does not provide legal, accounting, tax, or other professional advice. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.