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Tax News
Nonresident withholding requirements for S corporations

Revenue and Taxation Code Section 18662 requires S corporations to withhold tax on distributions of California source income paid to nonresident shareholders. These shareholders then typically must file California Form 540NR to report the income and pay any additional tax due, or claim a refund. Shareholders have two other options to fulfill California requirements:

  • Request a waiver of the withholding requirement using Form 588, Nonresident Withholding Waiver Request.
  • Elect to file a group nonresident return. See FTB Publication1067, Guidelines for Filing a Group Form 540NR.

FTB will step-up enforcement of the S corporation withholding provision in 2007. We mailed letters in late 2005, to all known S corporations with nonresident S corporation shareholders, to inform them of their nonresident S corporation shareholders' filing requirements (see Tax News January/February 2006: Information letters sent to S corporations with California income and nonresident shareholders). We also supplied the S corporations with informational letters about the filing requirements to distribute to their nonresident shareholders.

As part of our ongoing effort to inform S corporations and their nonresident S corporation shareholders of their withholding and filing requirements, we:

  • Mailed notices in November 2006, instructing the S corporations with nonresident S corporation shareholders to begin withholding starting in January 2007.
  • Will conduct additional education and outreach presentations to ensure S corporations are aware of withholding and filing requirements.
  • Will send notification of withholding requirements to new S corporations formed after December 16, 2005.

The forms and publications referred to above, as well as filing information, are available on our Website at www.ftb.ca.gov or by calling FTB's Taxpayer Services Center at (800) 852-5711 (toll-free) or (916) 845-6500 (not toll-free). FTB's Withholding Services and Compliance Section offers seminars to help our customers understand California Nonresident Withholding requirements for S Corporations. To schedule a seminar, contact us at WSCS.Seminars@ftb.ca.gov