California
California state tax preparation
California state tax preparation deals with the highest state income tax rate in the nation, an additional Mental Health Services Tax on top earners, complex source rules for nonresidents and remote workers, and an aggressive residency audit program. Form 540 and Form 540NR returns prepared with care. Solid preparation pays for itself.
How does California individual income tax work?
California has the highest top marginal income tax rate in the U.S. at 13.3 percent (12.3 percent regular plus 1 percent Mental Health Services Tax on income over $1 million). The brackets are progressive and apply to all California-source income for nonresidents, and to all worldwide income for residents.
What California tax topics come up most often?
- Form 540 personal income tax return. Filed by California residents on all worldwide income.
- Form 540NR nonresident or part-year resident return. Filed by nonresidents with California-source income, and by people who moved into or out of California during the year.
- Mental Health Services Tax. Additional 1 percent surtax on California taxable income over $1 million. Applies to residents and to nonresidents on California-source income.
- AB 5 worker classification. California's strict ABC test for distinguishing employees from independent contractors. Many gig and contract relationships that pass federal rules fail California's test.
- California source rules for remote workers. California taxes wages earned for work physically performed in California, regardless of employer location. A remote worker who occasionally works from California can owe California tax even on a small portion of wages.
- S corporation 1.5 percent tax. California imposes a 1.5 percent tax on S corporation net income at the entity level (not common with most other states).
- $800 minimum franchise tax. California LLCs and corporations pay an annual minimum franchise tax of $800 regardless of profitability.
- Pass-through entity tax (PTET) election. California allows partnerships and S corporations to elect to pay tax at the entity level, making it federally deductible (workaround for the $10k SALT cap on individuals).
- Capital gains. Taxed as ordinary income at California's high rates, with no preferential treatment.
- Real estate withholding. California requires withholding on real estate sales by nonresidents (3-1/3 percent of gross sale price unless an exemption applies).
What if I moved out of California (or am thinking about it)?
California residency departures are aggressively scrutinized. The Franchise Tax Board has a long history of challenging residency changes, particularly to no-income-tax states like Texas, Florida, and Nevada. Documentation matters.
Factors examined include: change of driver license, voter registration, vehicle registration, primary home location, location of business interests and employment, location of children's schools, location of medical and professional advisors, days physically present in each state, and intent.
The "safe harbor" rule (more than 546 days outside California in a continuous 18-month period) provides one path. Outside that, residency depends on facts and circumstances. Bringing California-source income (deferred compensation, real estate gains, partnership distributions) along after the move can keep California's claim alive even after a clean departure.
We work with clients planning California departures to document the change properly and prepare both California part-year returns and final-year exit returns.
I work remote from another state for a California employer. Do I owe California tax?
California uses a physical-presence rule for sourcing wages. Wages are California-source income only for the portion of work physically performed in California. A remote worker who never sets foot in California for work generally does not owe California tax on those wages.
Key complication: if you visit California for any work-related purpose during the year (a meeting, an offsite, a conference), the wages for those days become California-source and trigger nonresident filing. Tracking days carefully matters.
This contrasts with New York's convenience-of-employer rule, which can tax non-residents working remote even when never physically in New York. California is more favorable to true remote workers.
California tax FAQs
What is the top California state income tax rate?
13.3 percent on income over $1 million (12.3 percent base rate plus 1 percent Mental Health Services Tax). Brackets below that range from 1 percent at the lowest income levels up to 12.3 percent. California is the highest-tax state in the U.S. for top earners.
Does California tax non-residents on remote work?
Only for wages earned for work physically performed in California. Unlike New York, California does not have a convenience-of-employer rule. A remote worker who never enters California for work generally does not owe California tax on those wages. Days of physical presence for any work purpose, however, do create California-source income for those days.
Can I move from California to Arkansas to lower my tax?
Yes, but California's Franchise Tax Board scrutinizes residency departures aggressively. A clean exit requires consistent documentation: change of driver license, voter registration, primary home, employment, children's schools, and so on. The safe-harbor rule (more than 546 days outside California in a continuous 18-month period) provides one clear path. Outside the safe harbor, the change must be documented through facts and circumstances.
Does California require an LLC to pay tax even if it lost money?
Yes. California imposes an $800 minimum annual franchise tax on every LLC and corporation registered to do business in California, regardless of profit or loss. This applies the first year of registration and every year thereafter.
How does AB 5 affect my 1099 income from California clients?
AB 5 reclassified many California-based independent contractors as employees under a strict ABC test. If you provide services to a California-based business and the work is part of that business's regular operations, the business may be required to treat you as an employee under California law. This can affect both the 1099 vs W-2 question and the resulting tax treatment. Specific industries have exemptions; we walk through the analysis on intake.
Should my S corporation make the California PTET election?
Probably yes, if the S corporation has California-source income and the shareholders are subject to the federal $10,000 SALT deduction cap. The pass-through entity tax election lets the S corporation pay California tax at the entity level (federally deductible) rather than passing it through to be paid by the shareholders (subject to the cap). The shareholders then take a credit on their California 540 returns. Specific election timing rules apply.
What else should I read about California taxes?
Ready to file your California return?
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