Nonresident withholding at source
Requesting reduced withholding
Beginning January 1, 2008, we will implement a variety of changes to the Withhold at Source program for nonresident taxpayers. We discussed changes to forms and regulations in a September Tax News article. Our overall goal is to streamline processes, increase compliance, and bring consistency to the program. The processing changes for requesting reduced withholding will have a significant effect on nonresident entertainers, speakers, and their withholding agents.
Current law requires a withholding agent (booking agent, promoter, or venue) to withhold seven percent on the gross California (CA) source payment. In some circumstances seven percent of the gross California source payment may result in over withholding for the tax year. Since our purpose at FTB is, in part, to "collect the proper amount of tax revenue.," we are changing the way we process requests for reduced withholding to increase compliance and reduce the possibility of future over-withholding.
Beginning January 2008, withholding agents are instructed to withhold seven percent on all gross California source payments to nonresident payees, including entertainers, unless they receive a letter from us confirming a reduced withholding amount. The nonresident payee initiates a request for reduced withholding by completing new Form 589, Nonresident Reduced Withholding Request, before receiving payment for services. The payee must:
- Complete Form 589 based on expenses, costs, or other special circumstances that would justify a reduced withholding amount.
- Calculate the proposed reduced withholding amount as seven percent of the net California source payment, which is the gross payment minus expenses or costs identified on Form 589.
- Certify under penalty of perjury that the expenses and resulting reduced withholding calculations are true and correct.
After we analyze Form 589, we issue a letter to the payee and the withholding agent notifying them of our determination, and the amount to be withheld. Receiving Form 589 at least 10 business days before the withholding agent pays the nonresident payee will help us meet requests as quickly as possible.
In addition to the new Form 589, we will initiate the following activities in 2008:
- Outreach workshops - In early spring 2008, we will conduct education workshops specific to entertainment industry customers. The workshops will be held at our California Field Offices. In December 2007, go to our Website and search for entertainment for more information.
- Proactive reminder letters - We will issue 'soft' reminder letters to withholding agents that have scheduled performances with nonresident entertainers, athletes, or speakers. The letter reminds the withholding agent to withhold seven percent from the gross California payment, unless we approve a Form 589 submitted by the payee.
- Compliance audits - We will conduct compliance audits to educate withholding agents about the changes to our Withhold at Source program. Our goal is to increase compliance with withholding laws, and assist withholding agents understand changes that we will implement in 2008. Since these audits are directed toward educating our customer, we do not expect to issue penalties related to the new forms during the first year.