Tax News
When is a 1099-MISC Not Enough?

It is well known that Form 1099-MISC, Miscellaneous Income, is used to report to both the Internal Revenue Service (IRS) and FTB payments of miscellaneous income.

A common type of miscellaneous income is a payment made to an independent contractor for services performed for a trade or business. When all payments made to the independent contractor throughout the year are at least $600, a 1099-MISC is required to be filed.

Payments to corporations are exempt from this requirement.

Is filing a 1099-MISC enough for federal tax purposes?

Yes, unless there is a requirement to withhold tax.

Federal law only requires withholding of tax for payments made to independent contractors, in two instances. One instance is if the independent contractor is a foreign person performing personal services in the United States.

The second instance is when the independent contractor is subject to backup withholding. IRS requires backup withholding when the independent contractor fails to furnish a taxpayer identification number to the payer, provides an invalid taxpayer identification number, or fails to certify exemption from backup withholding.

Is filing a 1099-MISC enough for state tax purposes?

Yes, unless there is a requirement to withhold California tax.

For California purposes, when California source income payments in excess of $1,500 is paid to someone who is not a California resident, then a portion of this compensation must be withheld and submitted to us. Generally the amount withheld is seven percent of the California source income payments and must begin as soon as the total payments for the calendar year exceed $1,500. Withholding on the first $1,500 is optional. Form 590, Withholding Exemption Certificate is used to certify exemption from nonresident withholding.

Furthermore, when backup withholding is required for the IRS, backup withholding must also be done for us on California source income payments. With certain limited exceptions, seven percent of the reportable income must be withheld and submitted to us. Backup withholding applies to California residents and nonresidents on California source income payments.

General Guidelines

  • Before paying independent contractors, require them to:
    • Complete IRS Form W-9, Request for Taxpayer Identification Number and Certification.
    • Complete Form 590, Withholding Exemption Certificate, if applicable (to be valid, a physical address in California and a tax ID are required).
  • The payee may submit Form 588, Nonresident Withholding Waiver Request, or Form 589, Nonresident Reduced Withholding Request, to apply for a waiver or reduced withholding, respectively.
  • Withhold at the maximum rate, seven percent, unless:
    • The independent contractor is exempt based upon a properly completed Form 590 Withholding Exemption Certificate.
    • You received a waiver or reduced withholding authorization prior to the payment.
  • Submit Form 592, Resident and Nonresident Withholding Statement and
    Form 592-V Payment Voucher for Resident and Nonresident Withholding, by the required due dates.
  • Submit Form 592-B, Resident and Nonresident Withholding Tax Statement, to the payee by the required due date.
  • Submit IRS Forms 1099-MISC, Miscellaneous Income, to independent contractors, if required, whenever payments reach $600 in the calendar year.

For more information, go to ftb.ca.gov, and search for small business withholding. Use our online Small Business Withholding Tool to determine whether withholding is required for California.

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