What Is California Source Income for Nonresidents?

California source income for nonresidents is income with a connection to the state strong enough for California to tax it, and the test varies by type of income. Wages are sourced to where you physically do the work. Business profits are apportioned by where your customers are. Real estate income is sourced to where the property sits. Most investment income, including interest, dividends, and capital gains on stocks, is not California source income at all. Because California’s top marginal rate reaches 13.3%, getting the category right matters.

Wages and Payments for Personal Services

If you perform services for pay, California sources the income to the state where your body was located when you did the work. Where your employer is headquartered, where you signed the contract, and where the paycheck is cut do not matter.¹

When you split workdays between California and elsewhere, you allocate compensation with a simple ratio. Count the days you physically worked in California, divide by your total workdays, and multiply by your total compensation. The California portion is what the state can tax. A detailed day-by-day calendar is the single most useful piece of evidence you can keep in case the Franchise Tax Board (FTB) questions the allocation.

Remote Work for a California Employer

California does not follow the “convenience of the employer” rule used by states like New York. If you live outside California and work from your home office for a California company, your wages are not California source income.²

That protection ends the moment you cross the state line to work. A day at the company’s California office, a day at a client site in the state, or a day at a California conference on company business all generate California source income. For independent contractors, the FTB sources income to where the customer receives the benefit of the service, so an Oregon-based consultant advising a California client on its California operations creates California source income without ever entering the state.

Stock Options and Deferred Compensation

Moving out of California before an equity payout does not necessarily escape California tax. If you were granted stock options or earned deferred compensation while working in the state, California still taxes the share attributable to your California service period. The FTB sources the gain by comparing California workdays to total workdays during the period the compensation was being earned, not when it was received.³

If you were granted nonstatutory options while a California resident, worked the full vesting period in California, then moved to Texas and exercised, the entire gain is California source income because all the underlying services were performed in California. If only half your vesting-period workdays were in California, roughly half the gain is sourced to the state.

Athletes, Entertainers, and Transportation Workers

Professional athletes and entertainers use a “duty day” method. Total compensation is multiplied by the fraction of duty days spent performing in California. A player earning $10 million who spends 15 of 200 duty days in California sources $750,000 to the state.

Transportation workers (truck drivers, airline crews, rail employees) source income by the ratio of miles traveled or hours worked within California to the total. Federal law layers in additional protections for certain merchant seamen, rail carriers, motor carriers, and airline employees, which can exempt their compensation from California tax entirely.⁴

Business Income

If you operate a business that touches California and other states, the question is what share of the profit California can tax. Income earned in the regular course of operations is “business income” and gets apportioned using a formula. Incidental income, like proceeds from selling off surplus equipment, is “non-business income” and is typically allocated to the owner’s home state.

Single-Sales-Factor Apportionment

Most multi-state businesses apportion their business income to California using a single-sales-factor formula. Multiply total business income by a fraction: California sales on top, total sales everywhere on the bottom. The result is the California share. Certain businesses that earn more than 50% of their gross receipts from qualifying activities such as agriculture, extraction, or banking use a different formula that also weighs payroll and property.⁵

Under this single-factor rule, having employees or property in California does not increase the California share. Only where your customers sit matters. A software company with 500 California employees but customers across all 50 states apportions less to California than a company with no California employees and most of its customers in-state.

Market-Based Sourcing of Sales

California uses market-based sourcing to decide which sales count in the California numerator. Services are sourced to where the customer receives the benefit. Intangible property is sourced to where it is used. Tangible goods shipped to California buyers are California sales.⁶ The inquiry follows the customer, not the seller.

California may also treat related entities as a single “unitary business” when they share centralized management, functional integration, or economies of scale. When that happens, the combined income of the related entities enters the apportionment formula rather than just the California entity’s standalone numbers.

Federal Shield Under Public Law 86-272

Federal law blocks California from taxing an interstate business whose only California activity is soliciting orders for sales of tangible personal property, provided those orders are sent out of state for approval and filled by shipment from outside California.⁷

The shield is narrow. It covers only solicitation of orders for physical goods. It does not reach sales of services, software licensing, leasing, or sales of intangibles. It also disappears if the company does more than solicit in California: maintaining inventory, making repairs, providing installation, or collecting on accounts in-state can all push a company past the protection line.

Real Estate and Tangible Property

This is the simplest category. Income from real property is sourced to where the property is. If the building is in California, the income is California source income, and your residence has no bearing on that.

Rent from a California property is taxable regardless of where the landlord lives, and the same rule reaches short-term rental platforms. Depreciation, management fees, and maintenance reduce the taxable amount.²

Gain on the sale of California real property is always California source income, even if you have not lived in the state for years. The buyer is generally required to withhold 3⅓% of the sales price at closing and remit it to the FTB as a prepayment of the seller’s California tax. The same rule applies to income from mineral, oil, and gas rights tied to California land.⁸

Tangible personal property such as equipment, vehicles, or inventory is sourced to California if the property is located in the state at the time of the sale or other disposition.

Investment Income and Other Intangibles

For nonresidents, investment income gets favorable treatment. Under Revenue and Taxation Code Section 17952, income from stocks, bonds, notes, and other intangible personal property is not California source income. A nonresident selling stock in a California-headquartered company owes no California tax on the capital gain. Interest and dividends from personal investments are treated the same way.⁹

When Intangibles Acquire a California Business Situs

The general rule breaks down when intangible property acquires a “business situs” in California by being used in connection with a business operating in the state. A nonresident who licenses a patent exclusively to their California business may find the royalties treated as California source income and subject to apportionment. The same statute also pulls in a nonresident whose securities trading in California is so regular and systematic that the trading itself is doing business in the state.⁹

Selling a Partnership or LLC Interest

The sale of a partnership or LLC membership interest is generally treated as the sale of intangible property and sourced to the seller’s state of residence under Section 17952. A nonresident selling an interest in a California partnership can often avoid California tax on the gain. The exception is the portion of gain attributable to the partnership’s “hot assets” (unrealized receivables and inventory). That portion is sourced to California based on the partnership’s apportionment factors, as if the partnership itself had sold those assets.

Retirement Distributions

Federal law bars California from taxing retirement distributions paid to nonresidents. The protection covers 401(k) plans, traditional and Roth IRAs, 403(b) annuities, 457 deferred compensation plans, and government pensions. It does not matter that the retirement benefits were earned while working in California. Once you are no longer a California resident, the state cannot tax these distributions.¹⁰

Gambling Winnings

Casino winnings, horse racing proceeds, and other gambling income earned at California venues are California source income for nonresidents. California Lottery prizes are the exception. The state does not tax SuperLotto Plus, Powerball, or Mega Millions winnings, whether the winner lives in California or not.¹¹

Credits That Offset Double Taxation

California has no tax reciprocity agreement with any other state. If you earn California source income, you owe California tax on it regardless of your home state. The usual remedy for the overlap is a credit on your home state return for the tax you paid to California.

Most states let their residents claim a credit for income taxes paid to other states on the same income, generally limited to the lesser of the tax actually paid to California or the tax the home state would have imposed. A nonresident credit is also available on the California return, but only if your home state taxes the same income and does not give its own residents a credit for California taxes paid.¹² Because most states do offer their residents such a credit, the practical path is to pay California first and claim the credit at home.

How Nonresidents File and Pay

Nonresidents report California source income on Form 540NR. The form calculates tax with a ratio: you compute the tax on your total worldwide income as if you were a California resident, then multiply by the ratio of your California source income to your total income. You end up paying California’s progressive rates based on your actual income level, but only on the California-sourced slice.¹³

Filing Thresholds

Not every nonresident with California income must file. Thresholds are set by total gross income (worldwide) and California adjusted gross income. For the 2025 tax year, a single nonresident under 65 with no dependents must file if total gross income exceeds $22,941 or California AGI exceeds $18,353. The thresholds are higher for married couples, taxpayers over 65, and those with dependents, and they adjust annually for inflation.²

Estimated Payments on an Uneven Schedule

If you expect to owe at least $500 in California tax ($250 if married filing separately) and your withholding and credits will fall short, you must make estimated payments. California’s installment amounts are not equal, which trips up filers used to the federal schedule:¹⁴

April 15: 30% of the estimated annual tax
June 15: 40% of the estimated annual tax
September 15: nothing due
January 15: 30% of the estimated annual tax

An underpayment penalty applies if your total withholding and estimated payments fall below the smaller of 90% of the current year’s tax or 100% of the prior year’s tax.

Mandatory Withholding on Payments to Nonresidents

California requires payers to withhold 7% of California source payments to nonresidents once total payments exceed $1,500 in a calendar year. This reaches independent contractor fees, rents, royalties, partnership and LLC distributions, trust distributions, and gambling winnings.¹⁵

Real property sales have their own regime. The buyer generally withholds 3⅓% of the total sales price at closing and remits it to the FTB on Form 593. For installment sales, the 3⅓% applies to the down payment during escrow, and the buyer continues withholding on the principal portion of each subsequent payment.⁸

All withholding counts as a prepayment of tax. You claim the amounts as credits when you file your 540NR, and any excess over your actual liability comes back as a refund. Payers who fail to withhold when required face penalties and can be held personally liable for the tax that should have been withheld.¹⁵

1
Franchise Tax Board. FTB Publication 1017 – Resident and Nonresident Withholding Guidelines
2
State of California Franchise Tax Board. Part-year Resident and Nonresident
3
Franchise Tax Board. FTB Pub. 1100 – Taxation of Nonresidents and Individuals Who Change Residency
4
California Legislative Information. California Revenue and Taxation Code 17951
5
Franchise Tax Board. Apportionment and Allocation
6
California Legislative Information. California Code, Revenue and Taxation Code – RTC 25136
7
Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax
8
Franchise Tax Board. 2025 Instructions for Form 593
9
California Legislative Information. California Revenue and Taxation Code 17952
10
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
11
Franchise Tax Board. Gambling
12
State of California Franchise Tax Board. Other State Tax Credit
13
State of California Franchise Tax Board. What Form You Should File
14
Franchise Tax Board. Estimated Tax Payments
15
State of California Franchise Tax Board. Withholding on Nonresidents