If you hire a nonresident person or business to perform services in California, you generally must withhold 7% of the payment and send it to the Franchise Tax Board once your total payments to that payee exceed $1,500 in a calendar year. This California 7% nonresident withholding applies only to the portion of the payment tied to work physically performed in the state, and it is a prepayment of the nonresident’s California income tax, not a separate tax.1Franchise Tax Board. 2026 Instructions for Form 592 Resident and Nonresident Withholding Statement You, the payer, carry the compliance burden. Get it wrong and the FTB collects from you.
When the Withholding Obligation Starts
Anyone who controls, receives, or makes payments of California-source income to a nonresident is a “withholding agent” under Revenue and Taxation Code Section 18662. That covers businesses, individuals, property managers, and promoters.2Franchise Tax Board. Withholding on Nonresidents
Withholding is optional on the first $1,500 you pay a given nonresident during the calendar year. Once your cumulative payments cross that line, you must begin withholding 7% of the gross California-source amount going forward.1Franchise Tax Board. 2026 Instructions for Form 592 Resident and Nonresident Withholding Statement Track running totals through the year. A string of small invoices can push a vendor over the threshold mid-year, and from that point on the 7% applies.
If you fail to withhold when required, you are personally liable for the tax, plus interest and penalties. The money comes out of your pocket, not the payee’s.
What Counts as California-Source Income
The obligation turns on where the work was physically performed, not where the nonresident lives or where you cut the check. A consultant based in Oregon who flies to Los Angeles to work on-site for two weeks generates California-source income for those two weeks. Fees for work the same consultant does from Portland do not.3Legal Information Institute. California Code of Regulations Title 18 Section 18662-5 – Other Types of Payments and Withholding Obligations
When a contract covers work in and out of the state, only the California portion triggers withholding. The payee completes Form 587 (Nonresident Withholding Allocation Worksheet) to break down how much relates to in-state work.4Franchise Tax Board. 2025 Instructions for Form 587 Nonresident Withholding Allocation Worksheet If the payee is part of a larger multistate business, allocation may instead use the California apportionment percentage under UDITPA. Without a completed Form 587, withhold 7% of the full gross payment. Keep the form in your records for at least five years after the last payment; do not send it to the FTB.
When a contract bundles products and services, withholding applies only to the service component. The labor portion of an equipment installation is in; the cost of the equipment itself is not.
Who Counts as a Nonresident, and Who Is Exempt
A nonresident is anyone who is not a California resident. For business entities, that includes corporations, partnerships, and LLCs that are not qualified through the California Secretary of State to do business in the state and do not maintain a permanent place of business here.2Franchise Tax Board. Withholding on Nonresidents A corporation that is registered and qualified in California is treated differently from one that is not, even if its headquarters and employees sit elsewhere. That distinction catches payers off guard.
A payee who is actually a California resident or otherwise exempt files Form 590 (Withholding Exemption Certificate) with you, signed under penalty of perjury, identifying the specific exemption category.5Franchise Tax Board. 2025 Instructions for Form 590 – Withholding Exemption Certificate A valid Form 590 stops withholding. Keep it on file for at least five years after the last payment it covers; do not send it to the FTB.
Several payment types are excluded from the 7% rule regardless of the payee’s status:6Franchise Tax Board. FTB Publication 1017 Resident and Nonresident Withholding Guidelines
- Payments for goods rather than services.
- Employee wages, which run through the standard payroll withholding system instead.
- Interest, dividends, and similar income from intangibles, unless the property has acquired a business situs in California.
- Fees paid to a nonresident corporate director for attending board meetings in California.
- Compensation to motor carriers providing transportation across two or more states.
- Services performed entirely outside California.
Withholding is also not required when the payee is a government entity or a tax-exempt organization under California or federal law.7Franchise Tax Board. 2025 Instructions for Form 588 Nonresident Withholding Waiver Request
Special Rules for Entertainers, Athletes, and Speakers
The same 7% rate applies to payments to nonresident entertainers, athletes, and speakers, but the regulations sweep in a wider cast: actors, bands, orchestras, singers, wrestlers, sports athletes, stage crews, promoters, and talent agents.8Legal Information Institute. California Code of Regulations Title 18 Section 18662-6 – Nonresident Withholding, Entertainers, Athletes, and Speakers Venue owners and promoters are usually the withholding agents, and they must withhold on all related payments, including ticket sales and commissions.
Because performers often carry heavy travel and production expenses, Form 589 lets them request a reduced rate. The deductible expenses claimed on Form 589 cannot exceed 50% of the gross California-source payment. A full waiver request on Form 588 must be filed at least 21 business days before the performance. A Form 589 reduced-rate request must be filed at least 10 business days before the event if submitted online, or 21 business days for paper.
Reporting and Paying the Withheld Tax
You report and remit withheld amounts quarterly on Form 592 (Resident and Nonresident Withholding Statement), accompanied by Form 592-V (Payment Voucher). The 2026 periods and due dates:1Franchise Tax Board. 2026 Instructions for Form 592 Resident and Nonresident Withholding Statement
- 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 due date falls on a weekend or holiday, the deadline moves to the next business day. Payment can go through the FTB’s Web Pay system. Payers listing more than 250 payees on Form 592’s Schedule of Payees must file electronically through the Secure Web Internet File Transfer (SWIFT) process.
After the tax year closes, you must give each payee Form 592-B (Resident and Nonresident Withholding Tax Statement) by January 31 of the following year, showing total income reported and total tax withheld.9Legal Information Institute. California Code of Regulations Title 18 Section 18662-8 – Reporting and Remitting Amounts Withheld, Penalties, and Interest; Other Procedures
Waivers and Reduced Rates for the Payee
A nonresident whose actual California tax liability will be lower than 7% of their California-source payments can request relief up front. Form 588 asks for a complete waiver. The FTB’s primary basis for granting one is that the payee has filed California returns for the two most recent taxable years and is current on all tax obligations.10Franchise Tax Board. California Form 588 – Nonresident Withholding Waiver Request Form 589 asks for a rate below 7% when a full waiver does not apply, which is common for payees with high deductible expenses.11Franchise Tax Board. 2026 Instructions for Form 589
One trap for payers: filing the form does nothing on its own. The FTB must approve the request in writing before you can lawfully withhold at a reduced rate. A payee may tell you they filed Form 588 or 589 and ask you to stop withholding. Until you see the written approval notice, keep withholding at the full 7%. Acting on the payee’s word alone leaves you liable if the request is denied.
Penalties if You Fail to Withhold
Under Revenue and Taxation Code Section 18668, a withholding agent who fails to withhold or remit is personally liable for the greater of the amount actually withheld or the tax the nonresident owes California, up to the full amount that should have been withheld.12California Legislative Information. California Code, Revenue and Taxation Code – RTC 18668 Interest runs on any amount not paid by its due date, at 7% through June 30, 2026.13Franchise Tax Board. Interest and Estimate Penalty Rates
Separate penalties apply for late or incorrect Form 592 filings, assessed per payee:1Franchise Tax Board. 2026 Instructions for Form 592 Resident and Nonresident Withholding Statement
- $60 if filed 1 to 30 days late.
- $130 if filed 31 days to 6 months late.
- $340 if filed more than 6 months late.
Failing to furnish Form 592-B to the payee carries a penalty of up to $340 per statement not delivered on time, and $680 or 10% of the reportable amount (whichever is greater) if the failure is due to intentional disregard.14Franchise Tax Board. 2026 Form 592-B Resident and Nonresident Withholding Tax Statement with Instructions Because the penalties stack per payee, a withholding agent with multiple nonresident contractors can face thousands in combined assessments for one missed deadline.
The only escape from the underlying liability is showing “reasonable cause,” which the FTB evaluates case by case, looking at whether you exercised ordinary care in trying to comply.9Legal Information Institute. California Code of Regulations Title 18 Section 18662-8 – Reporting and Remitting Amounts Withheld, Penalties, and Interest; Other Procedures Not knowing about the rule does not qualify.
How the Nonresident Gets the Money Back
The withheld 7% is not lost. The payee uses the Form 592-B you issue to claim a credit on a California Nonresident or Part-Year Resident Income Tax Return (Form 540NR), entering the total on line 83 and attaching a copy of Form 592-B to the return.15Franchise Tax Board. 2025 California Nonresident or Part-Year Resident Income Tax Booklet If the amount withheld exceeds the nonresident’s actual California tax, the excess comes back as a refund. A nonresident who never files a California return forfeits the credit entirely.