I would change my relationship with the CA employees. Fire them then hire them back as contractors - just make sure you treat them as contractors. Will save you tons of money and headache. Good article on Articlebase: http://www.articlesbase.com/entrepreneurship-articles/reduce-your-payroll-costs-with-contractors-645808.html

You will still be subject to California sales taxes and possibly franchise tax based on the business you do in CA, in addition to CA employment tax.

Our company is based in North Carolina, yet will be contracted to deliver services in California, thereby engaging vendors and insurance requirements in multiple states. After researching HR company organizations, I located one that met the reporting standards that we will be needed in order to 'grow' our business, when we take out contract model to other states with their own laws. Please visit TriNet.com, who has met company standards, has compent quoting data, and excellent customer service. Karim N, is my contact there. To meet our company ethical standards, we built into the quote, a cost for medical services, albeit tests, premiums, etc,  to be paid to our 'vendors'. This was important since our vendors are health care providers and would like to be able to 'choose' their own providers/insurance.  

Based on my understanding of Colorado with California Employees, Colorado please correct me if I am wrong you are not doing business meaning selling products or services in California you have employees who perform administrative services for you company (i.e. bookkeeping etc) but live in California.  So if my understanding is correct of your business you would not be liable for sales tax because you are not selling any products or services in California and you are not a franchise correct me if I wrong if that is true there would be no franchise tax.

There are some issues you will need to address with your accountant for your particular circumstances. You will be subject to California employment taxes. If you sell your product in California, you will be required to collect California sales taxes, but you'll need to obtain a Seller's Permit first form the Board of Equalization. If you or your accountant have specific questions about your situation, I recommend contacting the Board directly. The franchise tax in California is a tax imposed on corporations (not necessarily a tax on franchises). Basically, the law is that if you are a corporation derving income from doing business in California you need to pay a corporation tax. So, the question for your accountant is if you are derving any income from the work your company is doing in California. Check out the Form 100 Booklet for more information about the corporation/franchise tax. If you feel you don't have all the answers, you can always contact the California Franchise Tax Board directly. Message Edited by BobK on 03-20-2009 07:17 AM

Additional thought, however, if your are selling products in services in California you would be liable for sales taxe but probably not franchise tax or less you have a franchise in California.

DO NOT Forget to file your payroll taxes / your own Social Security taxes. Otherwise you could end up with trouble from the IRS. Even if you're self employed you need to pay social security.

Let's clarify somethings to ensure that I understand your situation 1.  Your business is located physcially in CO, and registered as a business in CO. Question - What is your business entity? 2.  You have employees in CA but they do no do business in CA, they are the adminstrative support.   According to my research you do not need to register your business in CA because you are not physically located or doing business in CA you are based in Co and doing business in CO.  However you do have to register as an employer in CA because you have CA employees and you have to pay payroll taxes for California they are:   Unemployment Insurance (UI) is paid by employers. UI provides temporary payments to individuals who are unemployed through no fault of their own. Employment Training Tax (ETT) is paid by employers. ETT provides training funds to empower workers, promote business and boost California's economy. State Disability Insurance (SDI) is deducted (withheld) from employees' wages. SDI provides temporary payments to workers who are unable to perform their usual work because of a pregnancy or a nonoccupational illness or injury (work-related disabilities are covered by workers' compensation). Beginning January 1, 2004, SDI also includes Paid Family Leave (PFL), which provides benefits to workers who need to care for a seriously ill family member or to bond with a new child. California Personal Income Tax (PIT) is withheld from employees' wages and credited toward the amount due for the employees' annual California state income tax. Elective Coverage is offered to specific types of individuals and classes of employees who are excluded from UI and/or SDI. These can include: self-employed individuals; sole proprietors, husband/wife co-ownerships and certain family members working for them; partners; certain categories of workers for nonprofit organizations; SDI for employees of public entities; and school districts. For specific information, call EDD's toll-free number (888) 745-3886 or visit your nearest Employment Tax Office. Should you register your business in California you would then be responsible for CA taxes on your business since you are not a CA based business why would you register you business there.     I found this site and others very helpful in my research   http://www.taxes.ca.gov/newbus.shtml, www.deborahchew.com/start.html and cch state tax master guide for California and ColoradoI hope this answers you question.  I am not an West Coast tax practitioner but I enjoyed the tax law research.