In today’s dynamic business environment, transacting with companies and consultants from across the country is common. It is important for California businesses to review their withholding obligations if they make nonwage payments to a California nonresident (payee) over $1,500. Therefore, it is crucial to verify the residency status of the payee when entering a contract or making a payment.
You could have a nonresident withholding obligation if payments were made for the following:
- Compensation for services performed in California by nonresidents.
- Rent paid to nonresidents on real or personal property located in California if the rent is paid on behalf of the withholding agent’s business.
- Royalties from natural resources paid to nonresidents from business activities in California.
- Prizes and winnings received by nonresidents for contests in California.
- Endorsement payments received for services performed in California.
- Other California source income paid to nonresidents.
Could the nonresident payee be exempt from withholding?
It is possible that the nonresident payee may be exempt from California withholding. Payments not subject to withholding include payments:
- The payment is for goods.
- The payee has completed and signed Form 590-P, Nonresident Withholding Exemption Certificate for Previously Reported Income.
- The payee is a resident of California or is an S corporation, partnership, or LLC that has a permanent place of business in California.
- The payee is a corporation that is qualified to do business in California.
- The withholding agent’s California source payments to the payee do not exceed $1,500 for the calendar year.
- The payments are for income from intangible personal property, such as interest and dividends, unless derived in a trade or business or the property has acquired a business situs in California.
- The payments are for services performed outside of California or for rents, royalties, and leases on property located outside of California.
- The payment is to a nonresident corporate director for director services, including attendance at board meetings.
- The payee is a tax-exempt organization under either California or federal law.
- The income is derived from qualified investment securities of an investment partnership.
If one of the exemptions above apply, request a copy of the signed and completed Form 590, Withholding Exemption Certificate from the payee. This will relieve the withholding agent of withholding requirements if the form is completed in good faith. The Franchise Tax Board will notify you if the form cannot be relied upon.
How much to withhold?
Non-wage payments to nonresidents are subject to a 7% withholding tax. The payor is responsible for withholding and remitting the tax to the Franchise Tax Board quarterly. Failure to withhold and remit taxes can result in penalties and interest to the payor.
Complying
When signing a new contract, request that the domestic nonresident payee complete, sign, and return Form 587, Nonresident Withholding Allocation Worksheet before making the first payment. Maintain a copy of Form 587 for a minimum of 5 years and provide it to the Franchise Tax Board upon request.
If you have any questions about your withholding obligation, please reach out to a member of our team.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.