Remote workers vs contractors, and P.L. 86-272

The W-2 rule

One W-2 employee working from home in California is the employer's physical presence in the state. There's no minimum number of hours and no revenue test. The company is “doing business” in California, must register with the Secretary of State ($70 for an LLC, $100 for a corporation), and owes at least the $800 minimum tax every year the arrangement lasts. Most other states (New York, Texas, and the rest) treat an in-state employee the same way.

Payroll obligations come too: registering with the state's employment agency (the EDD in California), withholding state income tax, and paying state unemployment and disability programs. Those apply even in states where the income-tax nexus question is closer.

The contractor gray zone

A genuinely independent contractor (their own business, their own clients, their own methods) generally doesn't create income-tax nexus for you by working from California. The risk rises when contractors perform your core business operations in the state (engineering, customer support, fulfillment, sales beyond mere solicitation) on an ongoing basis: states can treat them as your agents, and their presence as yours. Our nexus checker flags three or more core-operations contractors in one state as a review trigger.

Worker classification is a separate risk. California's ABC test (AB 5) presumes a worker is an employee unless the business proves all three prongs, including that the work is outside the usual course of the hiring company's business. A “contractor” doing your core work is likely an employee under California law, which brings back payroll taxes, penalties, and the nexus you were trying to avoid.

P.L. 86-272 does not save the $800

Public Law 86-272 (15 U.S.C. §§ 381–384) stops a state from imposing a net income tax on a business whose only in-state activity is soliciting orders for tangible goods that are approved and shipped from outside the state. Its limits:

• It covers only taxes measured by net income. California's $800 minimum is a tax on the privilege of doing business, and the LLC fee is based on gross receipts: both fall outside it.
• It covers only sales of tangible goods. SaaS, digital products, and services get no protection.
• It covers only solicitation. An employee who installs, repairs, trains, or supports customers in the state, or does engineering work, is beyond it.
• States, led by the Multistate Tax Commission, increasingly treat many website interactions (post-sale chat support, account features, and similar) as unprotected activity.

Worked example: one engineer in Sacramento

A Delaware C-corp hires one W-2 engineer who lives in Sacramento, at $180,000. Result: California nexus on day one. The company pays $100 to register, owes the $800 minimum (or 8.84% of its California-apportioned income, if higher) each year, files Form 100, sets up California payroll, and keeps paying Delaware's franchise tax as well. The expensive alternative, calling the engineer a contractor while directing their daily work, leads to reclassification, back payroll taxes and penalties, and the same nexus, all at once.

Hiring in several states? Check each one in the nexus checker and read how California's doing-business tests work.