Who Is Exempt From TDS in California? Payees, Forms, and Waivers

California’s 7% nonresident withholding, sometimes called TDS (tax deducted at source), doesn’t apply to everyone. You are exempt from TDS in California if you’re a California resident with a valid taxpayer identification number, a business entity incorporated or qualified to do business in California, a tax-exempt organization, a government agency, or one of several other specifically listed payees. Certain kinds of payments are also carved out regardless of who receives them, and nonresidents who don’t fit any automatic category can ask the Franchise Tax Board for a waiver or a reduced rate.¹

The withholding is a prepayment, not a final tax. Any excess comes back when the recipient files a California return. But money held by the FTB is money you can’t use, so qualifying for an exemption up front matters.

Exemptions Based on Who You Are

California’s withholding regulations list more than a dozen payee categories that are automatically exempt. The payer doesn’t need FTB pre-approval for these, but does need documentation proving the exemption applies.²

California Residents

Withholding exists to capture tax from people and businesses that earn California-source income but might never file a California return. Residents are already in the FTB’s filing universe, so payments to them aren’t subject to the 7%.² You still have to provide the payer with a valid taxpayer identification number. Without a TIN, the payer must apply 7% backup withholding regardless of residency.³

California Business Entities

Payments to California business entities aren’t subject to withholding. A corporation qualifies if it’s incorporated in California or has qualified with the Secretary of State to do business here. LLCs and partnerships that are registered or qualified in the state are also covered, as is an LLC that has elected to be taxed as a corporation.² Without certification of the entity’s status, the payer has to withhold the standard 7%.

Tax-Exempt Organizations

Organizations that are tax-exempt under either California or federal law are exempt from withholding.² This covers 501(c) charities, educational organizations, religious institutions, and similar entities. The status must be current. If the organization loses its exemption, the payee has to notify the withholding agent so withholding can resume.⁴

Government Agencies

Payments to federal, state, and local government agencies, including their instrumentalities and political subdivisions, are outside the withholding system entirely. Government payees don’t even file a Form 590.⁴

Other Exempt Payees

Several additional payee categories qualify under the regulations:²

Estates and trusts established under California law.
Banks and banking associations.
Insurance companies receiving gross premiums.
Individual retirement accounts and federally qualified pension or profit-sharing plans.

Payments That Aren’t Subject to Withholding

Even if the payee is a nonresident with no status-based exemption, certain types of payments are carved out of the withholding requirement altogether:²

Payments for the purchase of goods.
Payments for services performed entirely outside California, since that income isn’t California-source.
Wages paid to employees, which run through the state’s wage withholding system instead.
Interest, dividends, and other income from intangible personal property, unless the property has acquired a business situs in California.
Fees paid to a nonresident for serving on a corporate board of directors.
Payments to motor carriers operating in two or more states, exempt under federal law.
Income from qualified investment securities that is excluded from a nonresident’s taxable income under state law.

This is where many payers slip up. A nonresident consultant who performs all their work remotely from another state isn’t subject to withholding, but a nonresident who flies to California and works on-site is.

The $1,500 Annual Threshold

Withholding isn’t required on the first $1,500 of total payments from a single payer to a single nonresident payee during a calendar year.¹ Once cumulative payments cross that line, the payer begins withholding 7% on subsequent payments. There’s no catch-up on amounts already paid. If the payer reasonably expected the year’s total to stay at or below $1,500 and that turned out to be wrong, withholding simply starts going forward from the point the threshold is exceeded.⁵

The threshold runs per payer-payee pair. A nonresident freelancer who earns $1,200 from one California client and $1,200 from another is below the threshold with each one, so neither client has to withhold.

Requesting a Waiver or Reduced Rate

Nonresidents who don’t fit an automatic exemption can still avoid the full 7% hit. The FTB offers two routes.

Full Waiver With Form 588

Form 588, Nonresident Withholding Waiver Request, asks the FTB to excuse withholding entirely.⁶ The FTB grants waivers for specific reason codes. Common ones include having filed California returns for the two most recent years and being current on all tax obligations, or making timely estimated tax payments for the current year.⁷ Newly admitted S corporation shareholders, partners, and LLC members can also request a waiver, which expires at the end of the calendar year following their admission date.

The payer must receive the FTB’s official approval letter before making the payment. A waiver covers only the specific tax year and transaction described in the letter.

Reduced Rate With Form 589

When the full 7% would overstate actual California tax liability, Form 589, Nonresident Reduced Withholding Request, lets the payee ask for a lower rate.⁸ The payee itemizes expenses against California-source income to show the FTB that a reduced percentage is appropriate.⁹ It’s common for nonresidents whose business costs shrink their taxable California income well below their gross receipts. Filing doesn’t guarantee a reduction, and the FTB must approve the request before payment is made.

Real Estate Sales Have Their Own Exemptions

California real estate sales use a separate withholding regime. The default is 3⅓% of the total sales price, collected by the escrow or closing agent.¹⁰ The seller certifies any applicable exemption on Form 593, which the escrow agent files with the FTB regardless of whether withholding was required.

Principal Residence

The most commonly used exemption applies when the property was the seller’s primary home. To qualify, the seller must have owned and lived in it as their main residence for at least two of the five years before the sale, matching the federal rule under IRC Section 121.¹¹ A separate certification is available when the property was last used as the seller’s principal residence, even if the two-year ownership test isn’t met.¹⁰

Loss or Zero Gain

If the sale produces a loss or zero gain for California tax purposes, the seller can certify a full exemption on Form 593. The seller has to calculate the property’s adjusted basis and confirm it equals or exceeds the amount realized.¹² A seller who knowingly files a false certification to dodge withholding faces a penalty of $1,000 or 20% of the required withholding, whichever is greater.¹⁰

Sales Price of $100,000 or Less

No withholding applies when the total sales price is $100,000 or less.¹³ With multiple sellers, the threshold is measured against the total transaction price, not each seller’s share. Multiple parcels bundled into the same escrow count as one transaction, so a combined price over $100,000 triggers withholding even if each parcel on its own would have been under the limit.¹⁴

Like-Kind Exchanges

A simultaneous like-kind exchange under IRC Section 1031 is fully exempt. A deferred exchange is also exempt at the time of the initial transfer. In either case, if the seller receives boot (cash, excess debt relief, or non-like-kind property) over $1,500, the qualified intermediary must withhold 3⅓% of that boot.¹⁰ A deferred exchange that fails or doesn’t meet the Section 1031 requirements is treated as a regular sale, and the full withholding applies.

Involuntary Conversions and Foreclosures

Property that is seized, destroyed, condemned, or disposed of under threat of condemnation is exempt from withholding if the seller intends to acquire replacement property qualifying for non-recognition of gain under IRC Section 1033.¹⁴ Foreclosures are also exempt.¹⁰

Entity Sellers and Non-Recognition Transfers

Corporations with a permanent place of business in California, and partnerships or LLCs qualified to do business in the state, can certify an exemption on Form 593 for real estate transactions. Transfers qualifying for non-recognition under IRC Section 351 (transfers to a controlled corporation) or IRC Section 721 (contributions to a partnership in exchange for a partnership interest) are also exempt.¹⁰

How to Actually Claim the Exemption

No exemption is self-executing. The payee or seller carries the full burden of claiming it, and without the right paperwork in hand before payment, the payer has to withhold.

For general non-wage payments, the payee files Form 590, Withholding Exemption Certificate, with the withholding agent. The payee checks the box matching the exemption reason, signs the form, and submits it before payment is made.⁴ A withholding agent who relies in good faith on a properly completed Form 590 is relieved of liability for that payment.

In real estate sales, the seller certifies exemptions directly on Form 593. The escrow agent collects the signed form and files it with the FTB regardless of whether tax was withheld.¹⁵ A loss or zero-gain claim requires the full computation in Part VI.

If Withholding Was Taken Anyway

Missed the paperwork? The withholding is a prepayment, not a final tax. Claim the withheld amount as a credit on your California return, and any excess comes back as a refund.¹ You’ll get the money, but filing is the only way to get it, and that can mean waiting months for cash that could have stayed with you if you’d claimed the exemption or reduced rate up front.

1
Franchise Tax Board. Withholding on Nonresidents
2
Legal Information Institute. 18 CCR 18662-4 – Withholding on Payments (Nonresident Individuals and Non-California Business Entities) – General
3
Franchise Tax Board. Backup Withholding
4
Franchise Tax Board. 2025 Instructions for Form 590 Withholding Exemption Certificate
5
Franchise Tax Board. FTB Publication 1017 – Resident and Nonresident Withholding Guidelines
6
Franchise Tax Board. 2025 Instructions for Form 588 Nonresident Withholding Waiver Request
7
Franchise Tax Board. California Form 588 – Nonresident Withholding Waiver Request
8
Franchise Tax Board. 2026 Instructions for Form 589 Nonresident Reduced Withholding Request
9
Franchise Tax Board. Form 589 Nonresident Reduced Withholding Request
10
Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
11
Legal Information Institute. 18 CCR 18662-3 – Real Estate Withholding
12
Franchise Tax Board. California Form 593 – Real Estate Withholding Statement
13
Franchise Tax Board. Real Estate Withholding
14
Franchise Tax Board. Real Estate Withholding Guidelines
15
Franchise Tax Board. 2025 Instructions for Form 593 Real Estate Withholding Statement