You then complete your CA non-resident return, reporting $2.5K of CA income since that is what your employer is reporting to CA that you earned there. I'm not familiar with the CA non-resident return, but there are two common ways to determine your NR tax, (1) based on income earned in-state

The CA forms use this method to determine the NR tax. But the income my employer is reporting (2.5K) isn't equal to the amount I earned in-state (20K). I can see the sense behind filing only what the employer reports to CA (especially since they have a large presence in both CA and AZ). In experience, does the employer's reported number always take president over the state method's number?

AZ probably will give you a credit against your income tax for part or all of the tax you paid to CA. Look carefully, because the credit may be on a different form.

Turns out AZ doesn't give a credit for income taxes paid to CA (or about 7 other states)...bummer. (The reverse is true, though.)

Ryan.