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Thursday, March 31, 2011

CA Franchise Tax Board Steps Up Enforcement of Nonresident Withholding Rules


If you are a California company that pays a nonresident of California income from sources in California, you may potentially have to withhold and send the Franchise Tax Board (FTB) seven percent of all payments that exceed $1,500 in a calendar year (California R&TC Section 18662).

Beginning January of 2010, the FTB stated that with certain limited exceptions, payers that are required to withhold and remit backup withholding to the IRS are also required to withhold and remit to the FTB.  Since the IRS is stepping up enforcement of their backup withholding rules, it is imperative that all California businesses familiarize themselves with the little-known California nonresident withholding rules.

Nonresidents are subject to withholding if they receive income for any of the following:

  • Services in California
  • Receipt of other types of nonwage payments

The payer who pays the contractor must:

  • Withhold seven percent of the payment at the time of the California source income payment, when applicable.
  • Report and send withheld amounts to the FTB.
  • Provide a Form 592-B, Resident and Nonresident Withholding Tax Statement, indicating the:
    • Amount you paid
    • Amount withheld

Reduced or Waived Withholding
Under certain circumstances, the contractor may be eligible for reduced or waived nonresident withholding.   You can use Form 590, Withholding Exemption Certificate, to certify an exemption from nonresident withholding.  California residents or businesses that have a permanent place of business in California are eligible for exemption.  Nonresidents may request a reduction in the standard seven percent by using Form 589, Nonresident Reduced Withholding Request.

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