Many people have moved since the start of COVID and now work remotely, but how does a move like that impact the taxes you pay, and how do taxes work on RSUs that were granted when you lived in California?
Employer Located in Another State – How do my state income taxes work when my employer is located elsewhere?
Generally – the “source” of income from services compensated by W-2 wages is the location where the services are performed, not the location of the employer. For example, I work in Oregon, my company is in California, and I pay Oregon state tax. My job is 100% remote, and I am not choosing to work remotely because taxes are cheaper in Oregon (even though they are).
Convenience Rule – What is the Convenience Rule?
Some states have a “convenience rule” for taxes, in which the employer’s state allows them to collect taxes on income earned from individuals working remotely elsewhere. For example, one may work in Florida remotely as a convenience because there are no state taxes there. Fortunately for me, California is not one of those states using the “Convenience of the Employer” rule [“COE”] (at least not yet). If you do work for an employer using the COE, like in New York, you’ll withhold and file taxes for both states. Currently, you are not double taxed as most states allow a credit for taxes paid to other states on the same income, but this may change in the future.
RSU and California Sourced Income – I was granted RSUs when I lived in California, but I’ve since moved to another state. How will taxes work?
RSUs present a unique situation. California has an RSU grant “clawback tax” if you choose to move to a different state. This is because California considers unvested grants California-sourced income. As the RSUs vest, you may need to file a non-resident tax return for years after you move because of the RSUs that were granted while you were living in the Golden State.
Typically, California taxes all California-sourced income, and most other states tax income earned as a resident. When I moved to Oregon, I had both California and Oregon withholding from each paycheck. California and Oregon tax your RSU income, and I sought out a credit on my tax return for automatic overpayment from the payroll withholding. California can still tax anything that Oregon has already taxed, but California is only going to receive tax dollars that exceed the credit for the Oregon taxes (if the California tax rate is higher than Oregon’s (which it probably is).
Resident vs. Domicile – How do my state taxes work if I moved during the year?
When you move to a new state, consider working with a tax professional to figure out your specific situation because it involves both residency and domicile. A good tax expert is worth the expense. Sometimes you can be a resident of both states, but you can only be domiciled in one. Check out this article on How State Income Taxes Work When You Live Or Work In Multiple States.
If you are interested in learning more about financial planning, including investing, consider consulting with a qualified and unbiased financial professional to discuss your options.