If you pay a nonresident individual or business more than $1,500 in a calendar year for services performed in California, you generally have to withhold 7% of the California-source portion and send it to the Franchise Tax Board. This is the California 7% nonresident withholding rule, and the obligation sits on you, the payer, not the person you’re paying.1Franchise Tax Board. 2026 Instructions for Form 592 Resident and Nonresident Withholding Statement The 7% isn’t an added tax on the nonresident. It’s a prepayment of their California income tax, credited back to them when they file a return.
When the 7% Obligation Starts
California Revenue and Taxation Code Section 18662 makes any person or entity that controls, receives, or pays California-source income to a nonresident a “withholding agent.”2Franchise Tax Board. Withholding on Nonresidents That sweeps in businesses, individuals, property managers, and promoters. Anyone writing the check.
The first $1,500 you pay a given nonresident in a calendar year is optional to withhold on. Once cumulative payments to that same payee cross $1,500, 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 per payee. A string of small invoices that individually look harmless can push you over the line mid-year, and the obligation attaches the moment you cross it.
What Counts as California-Source Income
The trigger is where the work is physically performed, not where the payee lives or where the check is cut. A consultant based in Oregon who flies to Los Angeles for two weeks of on-site work has generated California-source income for those two weeks. Work the same consultant later does from Portland does not.3Legal Information Institute. California Code of Regulations Title 18 Section 18662-5 – Other Types of Payments and Withholding Obligations
When one contract covers work performed both inside and outside California, only the California portion is subject to withholding. The payee completes Form 587 (Nonresident Withholding Allocation Worksheet) to break the payment into California and non-California columns.4Franchise Tax Board. 2025 Instructions for Form 587 Nonresident Withholding Allocation Worksheet Without a completed Form 587 in your file, or if you have reason to doubt the numbers on one, withhold 7% of the entire gross payment. Keep the form for at least five years after the last payment. Do not send it to the FTB.
Who Counts as a Nonresident
The FTB defines a nonresident as anyone who is not a California resident: someone passing through, visiting briefly, or here only to complete a short-term job.5Franchise Tax Board. Part-Year Resident and Nonresident For business entities, the term covers corporations, partnerships, and LLCs that are not qualified through the California Secretary of State to do business here and don’t maintain a permanent place of business in the state.2Franchise Tax Board. Withholding on Nonresidents Trusts are nonresident if they have no resident grantor, beneficiary, or trustee. Estates are nonresident if the decedent was not a California resident.
Verify residency before you pay. If the payee is a California resident or otherwise exempt, they give you Form 590 (Withholding Exemption Certificate), signed under penalty of perjury, identifying the exemption. That form stays in your files for at least five years after the last payment it covers.6Franchise Tax Board. 2025 Instructions for Form 590 – Withholding Exemption Certificate Do not send it to the FTB.
Payments That Are Subject to Withholding, and Payments That Aren’t
The 7% targets California-source income paid to nonresidents for services and certain other categories. The common ones are consulting fees, professional services, and contract labor performed in the state, along with rent and lease payments for real or personal property located in California.3Legal Information Institute. California Code of Regulations Title 18 Section 18662-5 – Other Types of Payments and Withholding Obligations When a contract bundles goods with services, withholding applies only to the service component. On an equipment installation, that means the labor, not the equipment itself.
FTB Publication 1017 excludes several categories from withholding:7Franchise Tax Board. FTB Publication 1017 Resident and Nonresident Withholding Guidelines
- Payments for goods (as opposed to services)
- Employee wages, which run through California’s payroll withholding system
- Interest, dividends, and similar income from stocks, bonds, and notes, unless the property has acquired a business situs in California
- Fees paid to a nonresident corporate director for attending California board meetings
- Compensation to motor carriers providing transportation across two or more states
- Services performed entirely outside California
Withholding also doesn’t apply when the payee is a government entity, a tax-exempt organization under California or federal law, or a corporation qualified to do business in California through the Secretary of State.8Franchise Tax Board. 2025 Instructions for Form 588 Nonresident Withholding Waiver Request That last one surprises people. A corporation whose headquarters and employees sit in another state is still exempt from this withholding if it happens to be qualified with the California Secretary of State.
Entertainers, Athletes, and Speakers
The same 7% rate applies to nonresident entertainers, athletes, and speakers, but the group of covered performers is broad: actors, bands, orchestras, singers, wrestlers, sports athletes, stage crews, promoters, and talent agents.9Legal 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 must withhold on all related payments, including ticket sales and commissions. Because touring performers carry heavy travel and production expenses, they can file Form 589 to request a reduced rate, with deductible expenses capped at 50% of the gross California-source payment.
Remitting the Money to the FTB
Withheld taxes are reported and paid quarterly on Form 592 (Resident and Nonresident Withholding Statement) with Form 592-V as the payment voucher. The 2026 periods and due dates:1Franchise Tax Board. 2026 Instructions for Form 592 Resident and Nonresident Withholding Statement
- January 1 – March 31: due April 15, 2026
- April 1 – May 31: due June 15, 2026
- June 1 – August 31: due September 15, 2026
- September 1 – December 31: due January 15, 2027
A due date falling on a weekend or holiday moves to the next business day. Payers can pay through Web Pay, and anyone reporting more than 250 payees on the Schedule of Payees must file electronically through the Secure Web Internet File Transfer (SWIFT) process.
Partnerships, S corporations, LLCs, and trusts making nonwage distributions to nonresident owners follow the same 7%, same $1,500, and same quarterly schedule, but they file Form 592-PTE and pay with Form 592-Q.10Franchise Tax Board. Pass-Through Entity Withholding
What Failing to Withhold Costs You
Revenue and Taxation Code Section 18668 makes a withholding agent who fails to withhold or remit 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.11California Legislative Information. California Code, Revenue and Taxation Code – RTC 18668 The money comes out of your pocket if you didn’t collect it from the payee.
Interest runs on any late amount. Through June 30, 2026, the rate is 7%.12Franchise Tax Board. Interest and Estimate Penalty Rates Separate per-payee penalties apply for late or incorrect Form 592 filings in 2026:1Franchise 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 give Form 592-B to the payee is steeper: up to $340 per statement, and $680 or 10% of the reportable amount (whichever is greater) if the failure is due to intentional disregard.13Franchise Tax Board. 2026 Form 592-B Resident and Nonresident Withholding Tax Statement with Instructions Because these penalties are calculated per payee, a payer with several nonresident contractors can face thousands of dollars for a single missed deadline.
The only escape from the underlying withholding liability is showing “reasonable cause” for the failure. The FTB weighs whether you exercised ordinary care in trying to comply.14Legal 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 isn’t enough.
Waivers and Reduced Rates
A nonresident whose actual California tax will be lower than 7% of their California-source payments can seek relief. Form 588 requests a full waiver, and the FTB’s main 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.15Franchise Tax Board. California Form 588 – Nonresident Withholding Waiver Request Form 589 requests a rate below 7%, which is common for performers and contractors with high deductible expenses.16Franchise Tax Board. 2026 Instructions for Form 589
One point trips up payers. Filing Form 588 or 589 does not change anything on its own. The FTB must approve the request in writing before you can legally reduce or stop withholding. If a payee tells you they’ve filed the form and asks you to stop withholding, keep withholding at 7% until you see the approval notice. If the request is denied and you acted on the payee’s word, you’re on the hook.
How the Nonresident Gets the Money Back
The 7% is a prepayment, not a loss. By January 31 of the year following the payments, the withholding agent gives each payee Form 592-B (Resident and Nonresident Withholding Tax Statement), showing total income reported and total tax withheld.14Legal Information Institute. California Code of Regulations Title 18 Section 18662-8 – Reporting and Remitting Amounts Withheld, Penalties, and Interest; Other Procedures
The nonresident then files a California Nonresident or Part-Year Resident Income Tax Return (Form 540NR), enters the withholding from Form 592-B on line 83, and attaches the 592-B to the return.17Franchise Tax Board. 2025 California Nonresident or Part-Year Resident Income Tax Booklet If the 7% withheld exceeds actual California tax owed, the excess comes back as a refund. Nonresidents who skip the California return forfeit the credit entirely, which is the most common way this money gets left behind.