What actually happens
An employee who lives in Texas and performs work in California sits in two tax systems at once. The residence state claims the right to tax all of a resident's income wherever earned; the work state claims the right to tax income sourced within its borders. Absent an agreement, both claims stand, and the conflict is resolved after the fact through a credit on the resident return rather than up front in payroll.
When California withholding starts
California applies a de minimis test before nonresident withholding begins. No day-count safe harbor. California PIT withholding is required once wages exceed the Low Income Exemption amount in the EDD withholding schedules (DE 44 / Method B), which varies by filing status and is adjusted annually -- exact 2026 figure not verified here, consult the current DE 44.
The trap is that thresholds are usually retroactive to the first day once crossed. An employee who spends 40 days in a 30-day-threshold state does not owe tax on 10 days; they owe it on all 40, and the employer is the one who failed to withhold.
Unemployment insurance goes to one state only
Income tax can be split between states. Unemployment insurance cannot. Under the localization test used by every state, an employee whose services are performed entirely in California is covered by California for unemployment purposes, and all wages are reported there — regardless of where they live, where you are headquartered, or which state's income tax you withhold. California's 2026 taxable wage base is $7,000. The four-factor test in order.
What you have to register for
| Obligation | State | Agency |
|---|---|---|
| Income tax withholding | California | California Employment Development Department (payroll tax and PIT withholding) |
| Unemployment insurance | California | California Employment Development Department (EDD) |
| Paid family & medical leave | California | California SDI (which funds both State Disability Insurance and Paid Family Leave) is employee-funded at 1.30% for 2026 with NO taxable wage limit. Employers make no SDI/PFL contribution. |
Frequently asked
Do California and Texas have a reciprocal tax agreement?
No. There is no reciprocal agreement between California and Texas. California taxes wages earned in the state by nonresidents, and Texas does not tax wages at all.
Which state's income tax should be withheld?
California, as the state where the work is performed. Texas imposes no wage income tax, so California is the only withholding obligation.
Which state gets the unemployment insurance wages?
California. Unemployment coverage is never split between states for a single job. The localization test assigns the whole job to the state where services are performed, which here is California, regardless of residence or where the employer is headquartered.
How many days can an employee work in California before withholding starts?
California applies a de minimis test. Once the limit is crossed, most states require withholding on all in-state wages for the year, not just the excess.