California taxes equity pay where the work was done, not where the client lives when it pays out. An RSU granted in San Jose and vesting in Austin two years later is still, in part, California wages. The Franchise Tax Board (FTB) says so in Publication 1004, and the W-2 usually agrees.
The client has moved and sold the house. The California return still exists, with a fraction on it.
Where the FTB says it
Publication 1004, Equity-Based Compensation Guidelines, covers stock options, restricted stock and employee stock purchase plans across a move. The current edition is dated January 2015, and the FTB’s nonresident page still links to it.
The statute is Revenue and Taxation Code Section 17951. A nonresident’s gross income “includes only the gross income from sources within this state.”
Publication 1031 says wages “have a source where the services are performed.” The employer’s location and where the payment is issued do not change that. Equity pay is wages, so the rule follows it out of the state.
The allocation method for options and RSUs
A nonstatutory stock option (NSO) is taxed at exercise. (An NSO is any option that is not an incentive stock option or an ESPP option.) Restricted stock and RSUs are taxed at vesting.
For a nonresident at that moment, Publication 1004 is direct. “California will tax the wage income you receive to the extent you performed services in this state.” That holds whether the client was always a nonresident or was “formerly a California resident.”
If every workday between grant and exercise was in California, the whole spread is California wages. The publication’s own example moves the employee to Texas a month before exercise, and sources all of it here.
If the work was split, the publication gives one reasonable method, a workday ratio. “California workdays from grant date to exercise date ÷ Total workdays from grant date to exercise date.”
For restricted stock the window runs from grant to the vesting date. In both cases the window closes early if employment ended first. The authority cited is California Code of Regulations, Title 18, Section 17951-5.
The worked example is 700 California workdays and 300 elsewhere. California taxes 70 percent of the income, whichever state the client is in on vest day.
Publication 1100, the FTB’s 2025 nonresident guide, still taxes a nonresident’s option income “on a source basis.”
ISOs and ESPPs
Incentive stock options (ISOs) get the favorable federal treatment, and California conforms. A qualifying disposition is capital gain. (Qualifying means holding two years from grant and one year from exercise.)
Capital gain is sourced to the state of residence on the sale date. A nonresident owes California nothing on it. That holds “even though the services that gave rise to the grant may have been performed in this state.”
A disqualifying disposition is different. The spread at exercise becomes wages. “The income source is where you performed services between the grant date and the exercise date.”
The alternative minimum tax (AMT) adjustment on an ISO exercise is sourced the same way. (The AMT adjustment is the exercise spread, counted for the parallel minimum-tax calculation.) It belongs to the exercise year even if the shares are sold after the move.
Employee stock purchase plans (ESPPs) follow the pattern. Ordinary income on a sale is California-source “to the extent you performed services in California” between grant and exercise. Any capital gain belongs to the new state.
What the new state does for them: nothing
The common destinations have no income tax to credit against. The Texas constitution says the legislature “may not impose a tax on the net incomes of individuals.” Nevada’s says “No income tax shall be levied upon the wages or personal income of natural persons.”
Florida’s bars a tax “upon the income of natural persons.” Washington’s Department of Revenue says the state “does not currently have an individual income tax.” A 9.9 percent tax above $1 million of income starts in 2028.
So there is no double tax, and no credit to argue about. The Schedule S instructions give nonresidents no California credit either, except residents of Arizona, Oregon, Virginia and Guam.
Publication 1031 explains that California taxes a nonresident’s California income at the rate their worldwide income would attract. A $60,000 California slice on a $400,000 earner is taxed at the $400,000 earner’s rate.
The W-2 is usually right
The flag arrives as a Form W-2 from the old California employer. Box 16, “State wages, tips, etc.,” has a figure, with CA in box 15, two years after the move. The client calls it a payroll error.
Check the vesting schedule before agreeing. If the grant predates the move, the employer is reporting what Publication 1004 describes. The IRS instructions leave the state boxes to state rules: “Contact your state or locality for specific reporting information.”
The FTB’s nonresident page covers the remote worker who left and performs no services here. “If you had ‘deferred’ or Equity-Based Compensation, you may still have California sourced income.”
The FTB’s letters page shows the other side. Form FTB 4579 asks an employer to “confirm California wage/income and State withholding information.” Form FTB 4600 tells the taxpayer, “We do not have a record of your California personal income tax return.”
Where it goes on the return
Publication 1031 sets the filing test: “any income from California sources” and gross income above the threshold. The return is Form 540NR with Schedule CA (540NR). Columns A through D build total income as if the client were a resident.
Column E then takes “income from California sources while a nonresident.” For wages, the nonresident entry on line 1a is the compensation “received for those California services.” That is the allocated figure, not federal box 1.
Column E, not the W-2, decides the tax. Where the employer’s sourcing differs from the ratio, column E follows the ratio.
The workpaper to keep
The file needs five things per grant: grant date, vest or exercise date, and the date employment ended if earlier. Then California workdays and total workdays in that window, and the ratio applied to the reported income.
The day count is the hard part. The client’s calendar, badge records and expense reports are usually where it comes from. Each tranche has its own window, so a four-year grant vesting quarterly is sixteen ratios.
Residency is a separate question and a bigger one. If the client never broke California residency, the ratio is moot and everything is taxable. Our note on the residency factors the FTB weighs covers that file.
What this means for your firm
This return is a sourcing calculation wrapped in a California filing. Software imports the W-2 and the 1099-B. It will not build the workday ratio or tell you which tranche box 16 represents.
This is the kind of return we prepare for firms. The Desk has filed 5,300+ tax returns in the last 4 seasons. Multi-state allocation is routine work here, and we have written about why it eats a preparer’s day.
What comes back is a per-grant allocation schedule, column E tied to it, and the W-2 reconciled line by line. One enrolled agent prepares the return and a second reviews it.
You review, you sign, you file. We never sign a return or e-file, so your firm stays preparer of record.
We work under ISO/IEC 27001:2022 certification, with an audit trail of who touched what. How we work with firms is at for expat tax firms. The client-facing side of a move between states is in our state tax guide.
If your California pile has a few of these, start small. We have written up what sending the first five returns involves. Pricing is on the pricing page.