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CA-592: Non-Resident Income Withholding

November 12th, 2014 No comments

The state of California requires withholding of 7% on payments of $1500 or more to both residents and non-residents of the state.  This form follows the federal tax template used by the IRS for reporting payments and withholding to non-US persons from US sources, regardless whether the recipient would have any tax liability or is a resident.

For purposes of reporting, California non-residents include:

  • Individuals
  • Businesses that are not registered with the Secretary of State
  • Independent Contractors providing services in California
  • Trusts and Estates

In addition to contractor services and business proceeds, the withholding requirement also extends to rents, royalties and trust or estate distributions.

The form itself is not complicated to understand, and the payer has the responsibility for the reporting withholding requirement.  The question for most non-residents is how to obtain a refund for the withheld amounts assuming that there is no tax liability.

Non-resident Tax Liability and Forms

This is a burdensome task for many non-residents, who according to the instructions must file a California tax return if they receive Form CA-592.  In addition, failure to file a tax return could result in penalties.  There is an additional form that is only for non-residents, CA-592-B, where withheld amounts are reported.

The California income tax form for non-residents is Form 540NR, and in order to get tax relief you may have to show that you paid tax on the California sourced income in your home state.  For this purpose you would file Schedule S, Other State Tax Credit, with 540NR.  If you qualify, you would get a tax credit on the California return for amounts paid in your home state.

If you don’t live in a state with a reverse credit agreement with California, you will have to complete 540NR along with the deductions and exemptions available, and pay the tax owed.  The availability of a refund will depend on the amount of income sourced in California, and the applicable rate after deductions.  If your home state does not offer a credit for those amounts paid, you will in essence pay double tax for the earned income or distributions.

To avoid the pain of double taxation, there is the remaining option to claim the withheld amounts as a deduction for those who itemize on their Federal tax returns. The taxpayer could then claim any amount refunded by California as income in the following year.  In the event that there is no refund due, then the only tax relief is via the federal deduction.

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