TL;DR (Too Long; Didn't Read)
California Taxes Your Work, Not Just Your Residence: If you were granted RSUs while living in California but moved to a tax-free state like Texas or Florida before they vested, California still claims a portion of that income.
The Allocation Formula: The FTB (Franchise Tax Board) uses a ratio based on the number of days you worked in California from the grant date to the vest date.
Withholding Isn't Compliance: Your brokerage may not correctly withhold for multiple states, often leading to massive "surprise" tax bills and underpayment penalties when you file your returns.
The Symptoms: The "Texas Surprise"
You finally did it. You packed up the house in Mountain View or San Francisco and headed to Austin or Miami. You updated your address in Workday, saw your California state withholding drop to zero on your base salary, and started enjoying that 7–13% "effective raise."
But then, your first major RSU tranche vests. You look at your supplemental pay stub or your Charles Schwab/Fidelity account. You’re living in a state with $0 income tax, yet there is a significant chunk of change missing, or worse, your brokerage only withheld federal taxes, leaving you to assume you’re in the clear.
The reality hits in April: Your tax software (or your CPA) informs you that you owe the State of California five or six figures in taxes, despite not having stepped foot in the Golden State for an entire year. You feel like you’re being "clawed back" into a system you thought you left behind.
The Technical Deep Dive: Source-Based Taxation
California is notoriously aggressive when it comes to tracking tech equity. Their logic is simple: RSUs are compensation for services rendered. If you were physically present in California when those services were performed (specifically between the time the "promise" was made at grant and the time it "materialized" at vest), California considers that "California-sourced income."
The Mechanics of the Allocation
California uses a "Workday Ratio" to determine how much they get to tax. The formula generally looks like this:
(Total Workdays in CA between Grant and Vest) / (Total Workdays between Grant and Vest) = Percentage Taxable by California
Example Scenario:
Grant Date: Jan 1, 2022 (Living in San Francisco)
Move Date: Jan 1, 2024 (Moved to Austin, TX)
Vest Date: Dec 31, 2024
Total Time in Vesting Period: 3 years (approx. 750 workdays)
Time Spent in CA: 2 years (approx. 500 workdays)
Even though you lived in Texas for the entire 2024 calendar year, California will tax 66.6% (500/750) of that RSU vest. If that vest was worth $200,000, California views $133,333 of it as their money. At California’s top brackets, that is a $12,000–$15,000 tax bill you likely didn't plan for.
ISO vs. RSU: A Double Headache
If you are dealing with Incentive Stock Options (ISOs), the "clawback" is even more complex. California does not follow federal law regarding the "favorable" treatment of ISOs for Alternative Minimum Tax (AMT) purposes in the same way. If you exercise and hold ISOs while a resident and then move, or if you exercise after moving, the "spread" at the time of exercise can still trigger California-sourced income liabilities.
The Record-Keeping Burden
The burden of proof is on you. If the FTB audits your return—which they frequently do for high-earning "out-movers"—they will look at cell phone records, credit card swipes, and flight logs to prove you weren't actually "working" in Texas as early as you claimed.
The Expensive Mistake: Doing Nothing
Many tech employees fall into one of two traps:
The "Ostrich" Method: You assume that because you have a Texas DL and a Texas address, California can't see you. This is a mistake. Companies report the grant-to-vest data to the state. When you eventually file your federal return with a Texas address but a W-2 showing CA-sourced equity, the FTB’s automated systems will flag the discrepancy.
The Underpayment Penalty: Most brokerages default to a flat withholding rate (often 10.23% for CA residents). However, if you are a "Non-Resident," the brokerage might not withhold anything for California. If you owe more than $500 to the state of California at the end of the year and didn't pay estimated taxes, you will be hit with Underpayment of Estimated Tax penalties, plus interest.
The Cost of Silence: If you vest $300k in equity and fail to account for the 9.3% or 13.3% California tax, you could be looking at a $30,000+ tax bill in April. If you don't have the cash liquid because you reinvested it or spent it on a new home in Austin, you are forced into an expensive personal loan or selling more stock at an inopportune time.
The Rally Solution: Real-Time Equity Intelligence
Calculating the "Grant-to-Vest" ratio across multiple tranches, refreshers, and sign-on bonuses is a nightmare in a spreadsheet. One mistake in your workday count can lead to an audit.
This is why we built Rally.
Rally is designed specifically for tech employees with complex equity structures. Instead of waiting for a shock in April, you can:
Sync Your Grants: Automatically pull in your RSU and ISO schedules.
Track Multi-State Liability: Rally factors in your move date and automatically calculates the "California Clawback" percentage for every future vest.
See Your "True" Net: Know exactly how much cash will hit your bank account after federal, state, and "clawback" taxes, so you can plan your house down payment or diversified investments with 100% accuracy.
You can spend your weekend trying to decipher FTB Publication 1004, or you can let Rally do the heavy lifting.
Check Your Withholding Now (Free)
Don't let a move to a "tax-free" state turn into a tax nightmare. Use Rally to see exactly how much California thinks you owe them before your next vest hits.
Rally Tax is an Authorized IRS e-file Provider and SOC2 Compliant.
Frequently Asked Questions:
1. My company didn't withhold any California tax on my latest vest. Am I in the clear?
Actually, this is a major red flag. Many payroll systems aren't sophisticated enough to track multi-state workday allocations. If they didn't withhold CA tax but the income is CA-sourced, you still owe the money. This often leads to a massive, unexpected tax bill in April, plus potential underpayment penalties because the state didn't get its money throughout the year.
2. What if I move to another state that also has income tax, like New York?
This creates a risk of "double taxation." In most cases, your new state of residence (NY) will tax 100% of the vest, but they may offer a "Prior State Tax Credit" for the taxes you paid to California. However, calculating these credits correctly is notoriously difficult and often requires professional help to ensure you aren't overpaying.
3. Can I just wait until I’ve lived in Texas for a year before vesting to avoid this?
Unfortunately, no. Because the ratio looks all the way back to the grant date, even waiting a year only shifts the percentage slightly. As long as the grant date occurred while you were a California resident, a portion of that specific grant will almost always be taxable by California.
4. How can I find out my actual tax liability before I file?
You can manually track every workday and grant date in a spreadsheet, or you can use Rally. Rally connects to your equity platform and automatically calculates your multi-state allocation, showing you the exact "withholding gap" so you can set aside the right amount of cash and avoid April surprises.
