Working Remotely in Texas for a California Company: Tax and Payroll Rules

As remote work grows more prevalent, particularly with advancements in technology and evolving workplace norms, understanding tax implications is essential for both employees and employers. This is especially important when employees live in one state while working for companies based in another.

For Texas residents employed by a California-based company, navigating tax and payroll regulations can be challenging due to differing state laws. Both personal income taxes and employer obligations are affected by these dynamics.

Residency and Income Allocation

Texas residents benefit from the absence of a state income tax, meaning their earnings are not taxed at the state level, regardless of their employer’s location. California, however, employs a “source-based” taxation system, taxing income derived from within the state. For remote workers, income is typically not considered California-sourced if all work is performed outside the state. However, any work conducted in California, even briefly, may render that portion of income taxable. This requires detailed tracking of work locations and days spent in California for proper tax reporting.

Income allocation between states can also influence federal tax obligations, including deductions and credits. For instance, if a remote worker travels to California for business, they must allocate income to reflect time worked in each state. Precise allocation is crucial for compliance and managing tax liabilities effectively.

Employer Withholding Requirements

Employers with remote employees in different states must understand withholding requirements to ensure compliance. California requires withholding of state income tax for wages earned within the state. For Texas residents working remotely, withholding differs because Texas has no state income tax.

Employers must establish an employee’s primary work location and responsibilities to determine withholding obligations. If a Texas resident occasionally works in California, employers may need to withhold California income tax for those days. Accurate record-keeping and payroll systems capable of multi-state tax calculations are essential for proper withholding and reporting.

Under California’s 2024 tax code, if a nonresident employee earns more than $1,000 from California sources in a calendar year, employers must withhold California income tax. Monitoring employee activities and earnings is critical to avoid unexpected tax liabilities. Employers must also stay up-to-date on annual tax code changes that could affect compliance strategies.

Nexus Considerations for Multi-State Companies

For multi-state companies, nexus—defined as the connection between a business and a state—can significantly impact tax obligations. A California-based company employing remote workers in Texas must understand when nexus is established and its implications.

Remote employees in Texas may create a physical nexus for a California company, leading to obligations such as Texas’s franchise tax. Texas imposes a margin-based franchise tax, with a 2024 standard rate of 0.75% and a reduced rate of 0.375% for retail or wholesale businesses. Companies must assess their total revenue to determine whether they exceed Texas’s nexus thresholds.

Economic nexus rules, based on sales volume or transactions, are also important. In 2024, Texas requires businesses with over $500,000 in sales to Texas consumers to collect and remit sales tax, regardless of physical presence. Companies need robust systems to track sales and ensure compliance with these standards.

Local Business Registration Factors

California-based companies employing remote workers in Texas must navigate Texas’s business registration requirements. While Texas is business-friendly, companies must adhere to specific rules to operate legally. Registering as a foreign entity in Texas involves applying for a Certificate of Authority through the Texas Secretary of State and paying associated fees. Additional permits or licenses may also be required, depending on the business’s industry and location.

Operating without proper registration can lead to penalties, including fines and restrictions on legal actions in Texas courts. Non-compliance may also harm a company’s reputation, potentially affecting client relationships and business opportunities.

Unemployment Insurance and Payroll Taxes

Unemployment insurance (UI) and payroll taxes are critical for employers with remote workers in different states. For a California-based company employing a Texas resident, understanding UI tax obligations is essential to avoid penalties and ensure proper benefits coverage. UI taxes are typically paid to the state where the employee works, meaning employers must register with the Texas Workforce Commission (TWC) and pay UI taxes to Texas. In 2024, Texas assigns new employers a standard UI tax rate of 2.7% on the first $9,000 of each employee’s wages, which may adjust based on the employer’s experience rating. Monitoring experience ratings is important, as they directly impact tax liability.

Payroll taxes also include federal obligations such as Social Security and Medicare (FICA) taxes and federal unemployment (FUTA) taxes. The FUTA tax rate is 6.0% on the first $7,000 of wages per employee, though timely state UI tax payments generally qualify employers for a 5.4% credit, reducing the effective rate to 0.6%. Employers must ensure payroll systems accurately account for these taxes, especially when managing multi-state payrolls. Errors in calculating or remitting these taxes can result in penalties and interest charges. Staying informed about legislative changes affecting tax rates or wage bases is necessary for effective payroll planning.