Form 587: California Nonresident Withholding and Allocation

California Form 587, the Nonresident Withholding Allocation Worksheet, is the form a nonresident contractor or consultant gives to a California payer to show how much of a contract payment is tied to work actually performed in California. California law requires payers to withhold 7% on California-source payments to nonresidents that exceed $1,500 in a calendar year, but a multi-state contract rarely has every dollar sourced to California.¹ Form 587 is how the payee certifies the California portion so the payer withholds on that slice and nothing more.

The withholding agent is supposed to request the form when the contract is signed and before any payment goes out.² The withholding requirement itself comes from Revenue and Taxation Code Section 18662.³

When Form 587 Is the Right Form

Form 587 is for a nonresident payee earning income from services performed partly or entirely in California who needs to allocate that income between California and non-California sources. A nonresident, in the FTB’s description, includes people passing through the state, visiting briefly, or present for a limited time to complete a job, transaction, or contract.⁴ That covers independent contractors, consultants, performers, construction workers, and other project-based workers whose work touches California.

Several common situations call for a different form instead:

A California resident, a corporation or LLC with a permanent place of business in California, or an entity qualified to do business in the state uses Form 590, Withholding Exemption Certificate.⁵
Real estate transactions use Form 593.
Employee wages are handled through payroll wage withholding, not Form 587.
Payments subject to backup withholding fall outside Form 587 as well.

Picking the wrong form at the start of a contract is one of the most common mistakes and creates problems for both sides down the line.

What to Have Ready Before You Fill It Out

The form collects identifying information for both parties. The withholding agent fills in name, address, and taxpayer identification number. The payee provides identifying details using one of the following: a Social Security number, an individual taxpayer identification number, a federal employer identification number, a California corporation number, or a California Secretary of State file number.² Check the box that matches the number you use. A missing or incomplete ID makes the form invalid.

You will also need the total contract amount, a description of the services, and the contract period. If a project crosses two calendar years, the allocation may need to be recalculated for each year, so pull the signed agreement, invoices, and project schedule before you start.

Allocating Income Between California and Elsewhere

Part IV is where the allocation happens. The payee splits contract payments into three columns:⁶

Column (a), Within California: the dollar amount tied to services performed inside the state.
Column (b), Outside California: the dollar amount tied to services performed elsewhere.
Column (c), Total payments: the sum of (a) and (b).

Only the figure in column (a) is subject to the 7% withholding. A consultant on a $100,000 contract who does 60% of the work from a home office in Texas would show $40,000 in column (a), and the 7% applies to that $40,000, not the full contract.

How you arrive at the split depends on the work. Time-based measures (hours or days spent in California versus elsewhere) suit most service contracts. Milestone or deliverable-based allocations fit projects where specific pieces are tied to specific locations. If your California work is part of a larger unitary business, the FTB instructions direct you to apply your California apportionment percentage using Schedule R rather than a simple geographic split.² Whichever method you choose, keep records that can back up the numbers if the FTB asks.

Where the Form Goes

The payee signs under penalty of perjury and returns the completed form to the withholding agent. It does not go to the FTB unless the FTB specifically asks for it.⁶ Getting it to the payer before the first payment matters, because the payer cannot reduce withholding without it in hand.

The withholding agent must keep the completed form for at least five years and produce it for the FTB on request.² That retained form is the payer’s main defense if the FTB later questions why the full 7% was not withheld on the entire contract.

Skipping or Reducing the 7% Withholding

A nonresident payee who wants to avoid the 7% withholding altogether can file Form 588, Nonresident Withholding Waiver Request, with the FTB. The FTB grants waivers in a few defined situations:⁷

The payee has filed California returns for the two most recent years and is current on all tax obligations with the FTB.
The payee is making timely estimated tax payments for the current year and is current with the FTB.
The payee is a corporation filing as part of a combined report with a California-based corporation.
The payee is a newly admitted S corporation shareholder, partner, or LLC member. This waiver expires at the end of the calendar year after the admission date.

If a full waiver isn’t available but 7% exceeds the actual tax liability on the California income, Form 589 allows a request for a reduced withholding rate instead.¹ Both the waiver and the reduction need FTB approval before the payer can adjust what it withholds, so submit early. Filing after money has already been withheld doesn’t claw back what the payer has already sent to the FTB.

Claiming the Withholding on Your California Return

The 7% withheld is a prepayment of California income tax, not a penalty. The payer will send the payee a Form 592-B showing the amount withheld.⁸ Nonresident payees claim the credit when they file Form 540NR, California Nonresident or Part-Year Resident Income Tax Return. The credit goes on Line 83, and a copy of Form 592-B attaches to the front of the return.⁹

When the amount withheld is more than the actual California tax owed for the year, the difference comes back as a refund. That happens often, especially when the effective California tax rate turns out to be lower than 7% or when the Form 587 allocation was on the conservative side. Filing the 540NR is the only route to recover the overage, so a nonresident who had any California tax withheld should file a California return even if the California income was modest.

1
Franchise Tax Board. Withholding on Nonresidents
2
State of California Franchise Tax Board. 2026 Instructions for Form 587 Nonresident Withholding Allocation Worksheet
3
California Legislative Information. California Revenue and Taxation Code 18662
4
Franchise Tax Board. Part-Year Resident and Nonresident
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Franchise Tax Board. 2025 Instructions for Form 587 Nonresident Withholding Allocation Worksheet
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Franchise Tax Board. California Form 587 – Nonresident Withholding Allocation Worksheet
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Franchise Tax Board. Nonresident Withholding Waiver Request – Form 588
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Franchise Tax Board. Resident and Nonresident Withholding Tax Statement
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Franchise Tax Board. 2025 540NR Booklet