A nonresident owes California tax on every dollar earned for work done inside the state. Where the worker lives does not matter. Where the work was done does.
The same rule reaches rent from a California house, the gain when it sells, and a California K-1. Much of it is withheld before any return is filed. So a Form 540NR often starts with a Form 592-B or 593 already in the client’s hand.
Where wages are sourced
The Franchise Tax Board (FTB) states it in Publication 1031. “Wages and salaries have a source where the services are performed.” The employer’s location does not change it. Nor does where the paycheck was issued or received.
The detail is in the regulation, 18 CCR §17951-5. Someone “employed continuously in this State” for part of a year owes tax on “the total compensation for the period.” A three-month project in San Jose is three months of wages.
Employees who work in California “at intervals throughout the year” apportion instead. The regulation’s measure is working days: California working days over total working days.
Salespeople paid on commission use a different ratio. California-source commissions are the share that California business volume bears to total business volume. (Business volume means sales transacted, not days present.)
Performers are the harshest case. Nonresident “actors, singers, performers, entertainers, wrestlers, boxers, etc.” include “the gross amount received for performances in this State.” No ratio, no proration.
Remote and hybrid workers
The FTB has a scenario page for the employee who moved out and still flies in. The answer is yes, a return is due. California-source income exists “to the extent you physically performed services in California.”
The page gives the arithmetic: “CA Workdays / Total Workdays = % Ratio”, then ratio times total income. A client with 230 workdays and 23 in California sources ten percent of her salary. Her W-2 will not show that split, so the preparer builds it.
Perform every service outside California and the wages are generally not California-source. The FTB’s one exception is deferred and equity-based compensation, covered in its Publication 1004.
Independent contractors are sourced differently. The FTB looks to “where the benefit of the service is received by the customer.” Where the work was done is not the test. A consultant in Austin serving a Los Angeles client has California-source income.
Rental income and real estate
Real property is the simplest case. Publication 1100 says “California taxes real property based upon where the property is located.” Rent from a California house is California-source income every year the nonresident owns it.
The gain on sale is California-source too. Publication 1017 says California real-property income “includes rents, lease payments, and the gain on the sale of such property.” A nonresident who sells a Palm Springs rental files a 540NR for that year.
Directors and K-1s
A board member who attends meetings in California is paid for work done here. Publication 1017 calls the fees compensation “for services performed in California by nonresident corporate directors.” The corporation does not withhold on them, but it must issue a Form 1099-MISC.
So the fee arrives with no California tax taken out. The exemption is from withholding, not from the tax.
Pass-through owners read column (e) of the California Schedule K-1. The 2025 Schedule K-1 (568) instructions point nonresident members to income “apportioned or allocated to California” in column (e). Those amounts go on Schedule CA (540NR), column E.
Schedule K-1 (565) for partnerships and Schedule K-1 (100S) for S corporations work the same way.
Who has to file
The 2025 Form 540NR booklet is direct. “Nonresidents of California who received California sourced income in 2025 ... file Form 540NR.” The threshold test then follows two steps. Both are measured on worldwide income, not California income.
Step 1 asks whether gross income “from all sources” exceeds the chart. For a single filer under 65 with no dependents, the figure is $22,941. Step 2 applies the same test to California adjusted gross income, $18,353 for that filer.
Married filing jointly, both under 65, no dependents: $45,887 gross or $36,711 AGI. A nonresident with $5,000 of California rent and a $200,000 salary elsewhere clears both.
And where tax was withheld, the only way to get it back is to file. The FTB’s withholding page says it directly: “When you file your tax return, you can claim your withholding.”
The withholding that arrives first
Form 592-B. Withholding agents must withhold 7% on payments to nonresident payees once California-source payments exceed $1,500 in a calendar year. (A withholding agent is whoever controls or pays the income: a promoter, a property manager, a partnership.) Wages are excluded; those run through the EDD.
The agent gives the payee Form 592-B by January 31. The 2025 instructions compute the tax “by applying a rate of 7% on items of income subject to withholding.” They also warn: “This withholding of tax does not relieve you of the requirement to file a California tax return.”
Rent is the common surprise. A tenant paying a nonresident landlord directly does not withhold. A property manager does, and may deduct its fee first.
Form 593. Withholding is required when California real estate is sold or transferred. The Form 593 instructions set the default at 3⅓% of the sales price, taken in escrow.
The seller can elect the alternative withholding calculation instead. That is the seller’s “applicable tax rate” multiplied by the estimated gain in Part VI of the form. Where the gain is small and the price is large, the election saves real cash at closing.
No withholding applies when the sales price is $100,000 or less, or the seller certifies an exemption in Part III. The main ones are a principal residence and a loss or zero gain. A knowingly false certificate costs $1,000 or 20% of the required withholding, whichever is greater.
Both forms land on the same line. Line 83 of the 540NR takes “the total California tax withheld from your Forms 592-B and 593.” Copies are attached.
The 540NR in one paragraph
Schedule CA (540NR) columns A through D compute income as if the client were a resident all year. Column E holds the California-source amounts. For a nonresident’s wages, the instruction is to enter the pay “received for those California services.”
Tax is figured on the all-sources figure, then an effective rate is applied to California taxable income. The booklet defines it: “the tax on total taxable income, taken from the tax table, divided by total taxable income.” Our part-year resident article walks the form line by line.
What this means for your firm
These returns are not technically hard. They are hard because the facts are not on any form. The W-2 does not show California days, and the Form 593 does not show the gain.
Someone has to build the workday count, source each K-1 line, and compute the real gain on the sale. Then decide whether the thresholds are met at all. Our guide to multi-state allocation work covers how we document that.
This is the kind of return we prepare for firms. One enrolled agent prepares, a second reviews, and the sourcing workpaper comes back with the return. 5,300+ tax returns filed in the last 4 seasons.
You review, you sign, you file. We never sign a return or e-file. Your firm stays preparer of record.
We work under ISO/IEC 27001:2022 certification. How firms work with us is at for expat tax firms. Pricing is on the pricing page.
If the pile has a few of these, pull them out first. We have written up how to triage the extension pile and what sending the first five returns involves.