If you’re making vendor payments for a California business location, you need to watch out for payments that are subject to the State of California’s 7% withholding requirements. The California Franchise Tax Board has just issued a new chart, which they hope will make the process easier to understand. The new two-page chart is posted on the FTB website at http://www.ftb.ca.gov/forms/misc/1018.pdf.
Payments of California-source income to a nonresident of California generally require withholding of 7% for California income tax. For vendor payments, this happens most frequently when a nonresident of California provides services within California. The payee can claim an exemption through FTB Form 590, request a waiver through FTB Form 588, or request a lower rate of withholding through FTB Form 589.
California also has a backup withholding requirement, which applies to nonresidents and residents of California alike. Seven percent backup withholding of California income tax is required on any payments that are subject to federal backup withholding (such as reportable payments for which the payee did not provide a taxpayer ID number).
The new FTB chart explains nonresident and backup withholding in three steps:
Stage 1: Forms you may need to obtain prior to making a payment.
Stage 2: Withholding the tax.
Stage 3: How and when to deposit the tax and report it to the FTB and the payee.