The California Franchise Tax Board (FTB) generally requires withholding agents (payers, below) to withhold 7% state income tax from payments to independent contractors for services, if the payments exceed $1,500 in a year. Payers include all types of business entities including nonprofit organizations. Payees may be residents or nonresident individuals or businesses performing services in California.
New this year: (Effective 1/1/2010)
State backup withholding if required if the recipient is subject to Federal backup withholding. This applies to residents and nonresidents.
Backup withholding is required if no taxpayer ID number is provided, or if the IRS Form W-9 is missing a taxpayer ID number or does not certify that they are exempt from withholding.
For California, the backup withholding rate on payments for services is 7%.
Before you pay an independent contractor:
If the payee (resident or nonresident) claims they are exempt from State withholding obtain either a FTB Form 590, Withholding Exemption Certificate, from them or a copy of the FTB letter granting them a waiver from withholding.
A nonresident payee may request a waiver from withholding by filing FTB Form 588, Nonresident Withholding Waiver Request. If the waiver is approved, the FTB will send the payee a letter. A copy of the letter should be provided to the payer to keep on file.
A nonresident payee may also request reduced withholding from the FTB by filing FTB Form 589, Nonresident Reduced Withholding Request. The FTB will respond with a letter, if reduced withholding is granted. A copy of this letter must be provided to the payer.
Payers use forms FTB Forms 592 and 592-V to submit the amounts withheld to the FTB.
Payers use Form FTB Form 592-B to give to payees at end of year to show total withheld. They will need this to file California tax returns.
Penalties may be assessed upon a payer who neglects to withhold the appropriate amounts from payments to an independent contractor. The payer may be held responsible for 100% of the payee’s tax liability, but not more than the amount of withholding that was required.
For More Information:
See FTB Publication 1017 available at http://www.ftb.ca.gov/forms/2009/09_1017.pdf for further information for payers.
FTB Form 1076 available at http://www.ftb.ca.gov/forms/2009/09_1076.pdf provides an explanation of the state’s nonresident withholding requirements to give to payees.
Two handy decision charts can also be found on the FTB website to determine withholding requirements:
For Entertainment Industry Independent Contractors
For California source income to Nonresidents: