867L Tax Code: California 7% Withholding on Nonresidents

If you pay a nonresident more than $1,500 of California-source income in a calendar year, California Revenue and Taxation Code Section 18662 requires you to withhold 7% of that payment and send it to the Franchise Tax Board.¹ The 7% is a prepayment of the nonresident’s California income tax, not a separate levy. When the payee files their California return, they claim credit for what you withheld and either owe the difference or get a refund. These are California’s nonresident withholding rules, and they apply whether you’re a business hiring an out-of-state contractor, a property manager collecting rent for an owner in another state, or a partnership distributing profits to a nonresident partner.

Who Has to Withhold

The person or business making the payment is the withholding agent, and the legal duty to deduct the 7% before the money leaves sits with them.² A payee is a nonresident for this purpose if they don’t live in California (individuals) or aren’t organized or commercially domiciled here (entities). A California resident or an exempt entity can certify that status by giving the withholding agent a completed Form 590, which stays valid until the payee’s status changes.³

The $1,500 threshold is measured across the calendar year, per payee. Once cumulative payments to one nonresident cross that line, withholding applies to payments that push you over and to everything that follows.

Payments That Trigger Withholding

California’s rules target income that’s predictable and easy to quantify when the check is cut. The main categories are:

Compensation to nonresident independent contractors for work performed in California, including construction, consulting, and entertainment.
Rent on California real estate and royalties from intellectual property used in the state.
Distributions from California trusts and estates to nonresident beneficiaries.
Gambling winnings paid by California gaming operations to nonresident winners.
Distributions to nonresident partners or members of California-based partnerships and LLCs.¹

Employee wages run through a separate system administered by the Employment Development Department and don’t go on Form 592.

How California Sources Income

Withholding only applies to the California-source portion of a payment. Sourcing rules decide what counts.

Services

Income from personal services is sourced to where the work is physically done, regardless of where the employer sits or the worker lives. Time in California gets allocated proportionally. A consultant who spends 144 of 240 working days in the state sources 60% of the compensation here.⁴ The payee reports this allocation to the withholding agent on Form 587, which the agent keeps on file.⁵

Real Property

Rent, sale proceeds, and other income from California real estate are always sourced to California based on where the property sits.⁶ The rule is simple: California land, California income.

Intangibles

Income from patents, copyrights, and similar assets generally follows the owner’s state of residence rather than where the property is used. It becomes California-source only if the intangible has acquired a business situs in the state, meaning it’s used as business capital here or its management is centered here.⁶ A nonresident who simply licenses a patent to a California company may not owe California tax on the royalties.

Remote Work

California uses the physical-location rule for remote workers: income is sourced to the state where the worker sits when the work is done. A nonresident contractor doing all the work from home in another state generally has no California-source compensation, even if the client is in Los Angeles. Some other states apply a “convenience of the employer” rule that reaches the opposite result, which can create double-taxation conflicts, but California itself looks to where the work happens.

Real Estate Sales Run on a Separate Track

Sales of California real property don’t use the 7% Form 592 process. Instead, the buyer or escrow agent withholds 3⅓% of the sales price and reports it on Form 593.⁷ It applies to outright sales, exchanges, and easement transfers.⁸

Withholding isn’t required when the sales price is $100,000 or less, the sale is a foreclosure, or the seller qualifies for one of the exemptions listed on Form 593. Sellers claiming an exemption submit Form 593 to escrow before closing. For installment sales, the 3⅓% applies to the principal portion of each payment after the initial close.⁷

The Forms You Need

California’s nonresident withholding system runs on a small set of interlocking forms. Skipping one is where most compliance problems begin.

Form 592 is the quarterly report of total withholding by payee.⁹
Form 592-V is the payment voucher that goes with any check or money order sent with Form 592.¹⁰
Form 587 is the payee’s allocation worksheet identifying the California-source portion of the income; the withholding agent keeps it.⁵
Form 590 is the exemption certificate for California residents and exempt entities.³
Form 592-B is the year-end statement given to each payee showing what was withheld.¹¹
Form 592-F handles foreign (non-U.S.) partners and members of California partnerships and LLCs under R&TC 18666.¹²

Every form needs a valid taxpayer identification number for the payee: SSN, ITIN, FEIN, California corporation number, or Secretary of State file number. Without one, the withholding agent cannot pass the withholding credit through to the payee.⁹

Reducing or Waiving the 7%

A flat 7% can overstate a nonresident’s actual California liability, especially when deductible expenses eat into the gross payment. Two paths reduce the amount.

Reduced Rate: Form 589

A nonresident can request a lower rate by filing Electronic Form 589, itemizing expenses against the California-source income. If approved, the FTB sends both payer and payee a letter confirming the reduced amount. Processing runs about ten business days. Income from more than one rental property or royalty stream requires a separate Form 589 for each.¹³

Full Waiver: Form 588

A full waiver is available through Form 588. When granted, the FTB issues a Waiver Determination Notice telling the withholding agent to stop withholding. Waivers last up to 24 months and expire on December 31 of the year after approval. Requests should go in at least 21 business days before a payment is due.¹⁴

Form 588 doesn’t work for foreign partners or members (they use Form 589), California real estate sales (Form 593), backup withholding, or EDD-administered wages. A granted waiver doesn’t change whether the income is taxable or whether the payee still needs to file a California return. It only removes the prepayment step.¹⁴

Quarterly Deadlines

Withholding agents file Form 592 and remit the tax quarterly. The 2026 due dates are:

January 1 through March 31: due April 15, 2026
April 1 through May 31: due June 15, 2026
June 1 through August 31: due September 15, 2026
September 1 through December 31: due January 15, 2027

When a deadline lands on a weekend or holiday, it shifts to the next business day.⁹

Form 592 can be filed electronically through MyFTB or on paper. Filing the form electronically doesn’t eliminate the paper 592-V voucher if you’re paying by check; the payment side has to be electronic too for a fully paperless quarter.¹⁰

Year-End Statements to Payees

After the calendar year closes, the withholding agent gives each payee a Form 592-B showing the total withheld. The deadline is January 31 following the close of the year. Brokers have until February 15. Delivery can be electronic.¹¹

For foreign partners and members, the deadline follows the entity’s schedule: the 15th day of the third month after the close of the taxable year, or the 15th day of the sixth month if every partner or member is foreign.¹² Payees use the 592-B amount to claim a credit on their California return.

Penalties

Late payments and late information returns are penalized separately, and the information-return side jumped meaningfully starting with the 2026 tax year.

Late Payment

Missing the remittance deadline triggers a one-time 5% penalty on the unpaid amount, plus 0.5% for each month it stays late, running up to 40 months and capped at 25% of the unpaid tax. Interest runs on top.¹⁵

Late or Incomplete Form 592 Schedule of Payees

Starting with 2026, the tiered penalty is:

1 to 30 days late: $60 per payee
31 days to 6 months late: $130 per payee
More than 6 months late: $340 per payee⁹

Because these are per-payee amounts, exposure scales quickly. A six-month-late filing covering ten payees runs $3,400 before interest.

Real Estate

A buyer who was properly notified of the real estate withholding requirement but failed to withhold owes the greater of $500 or 10% of the amount that should have been withheld. The same penalty applies to an escrow agent who fails to notify the buyer of the obligation.¹⁵

A Note on Foreign Payees and Federal Withholding

The 7% California rule is separate from the federal 30% withholding under IRC 1441 that applies to most U.S.-source income paid to foreign persons.¹⁶ A nonresident who is also a foreign person can face both. Federal withholding doesn’t satisfy the California obligation, and California withholding doesn’t satisfy the federal one. Foreign partners and members cannot use Form 588 for a full state waiver but can request a reduced rate through Form 589.¹⁴

1
Franchise Tax Board. Withholding on Nonresidents
2
Legal Information Institute. California Code of Regulations Tit. 18, 18662-5 – Other Types of Payments and Withholding Obligations
3
Franchise Tax Board. 2025 Instructions for Form 590 Withholding Exemption Certificate
4
California Franchise Tax Board. Residency and Sourcing Technical Manual – Section: 3200 Compensation for Personal Services
5
Franchise Tax Board. 2026 Form 587 Nonresident Withholding Allocation Worksheet
6
California Franchise Tax Board. Residency and Sourcing Technical Manual
7
Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
8
Franchise Tax Board. Real Estate Withholding
9
Franchise Tax Board. 2026 Instructions for Form 592 Resident and Nonresident Withholding Statement
10
Franchise Tax Board. 2026 Instructions for Form 592-V Payment Voucher for Resident or Nonresident Withholding
11
Franchise Tax Board. Resident and Nonresident Withholding Tax Statement
12
Franchise Tax Board. Instructions for Form 592-F Foreign Partner or Member Annual Withholding Return
13
State of California Franchise Tax Board. Form 589 Nonresident Reduced Withholding Request
14
Franchise Tax Board. 2026 Instructions for Form 588 Nonresident Withholding Waiver Request
15
Franchise Tax Board. FTB 1024 – Penalty Reference Chart
16
IRS. NRA Withholding