California has Started "Back-Up" Withholding of 7%

By Ron Cohen, CPA, MST
Partner
Greenstein, Rogoff, Olsen & Co., LLP

Be careful to consider these rules for payments from a California taxpayer to a person earning income that is California “Source.”

The penalties mount quickly on this type of reporting.

“Starting January 1, 2010, individuals and other payers that are required to withhold and remit backup withholding to the Internal Revenue Service (IRS) must also withhold and remit to the Franchise Tax Board (FTB). Generally, payers must withhold and remit 7% of reportable income to California when performing federal backup withholding. California backup withholding is required if a payer pays income to a nonresident or to a resident at certain minimum levels as required by the IRS, except for: (1) payments of interest and dividends (reported on IRS Forms 1099 INT, 1099 DIV, 1099 OID, and 1099 PATR); and (2) any release of loan funds made by a financial institution in the normal course of business. Payers backup withholding when a payee submits an IRS Form W-9 that does not provide a taxpayer identification number (TIN), provides an invalid TIN, or fails to certify exemption from backup withholding. Tax-exempt organizations and certain other payees listed on IRS Form W-9 are exempt from backup withholding. Taxpayer inquiries can be directed to the FTB's automated line at (888) 792-4900 ((916) 845-4900 if outside the United States) or inquiries can be faxed to (916) 845-9512."

(California FTB Public Service Bulletin California FTB Public Service Bulletin 10-02, 01/14/2010 .)

If you have any questions or comments, please call GROCO at (510) 797 8661.