Tax Withholding for CA Flow-Through Entities
The withholding applies to Interest, Dividends and Compensation for personal services.
Domestic (non-foreign) Non-resident Partners
Partnerships are required to withhold income taxes when distributing current or prior year income to domestic non-resident partners. Withholding is not required if distributions to a partner are $1,500 or less during the calendar year (R&TC Sec 18662)) The withholding rate is 7% of distributions of California source income to domestic non-resident partners.
Foreign (non-U.S.) Partners
Withholding is required on income from California sources which is allocated to foreign partners. R&TC Section 18666 generally conforms to federal Internal Revenue Code (IRC) Section 1446 to the extent that the income is from California sources. (CA R&TC Section 18666) The withholding rate is 12.3% of distributions of California source income to foreign non-resident, noncorporate partners.
• The FTB allows foreign partners to request reduced or no withholding of California tax on effectively connected taxable income from California sources allocable to a foreign partner by certifying to the FTB and the partnership that no or reduced California tax will be due. See FTB Form 589 instructions for details.
Withholding Exceptions
Withholding is not required if one of the following exceptions is met:
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The partner is a California resident.
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The partner is a corporation that is qualified through the California Secretary of State to do business in California or has a permanent place of business in California.
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The partner is a partnership that has a permanent place of business in California.
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The total distributions of California source income to the partner are less than or equal to $1,500 for the calendar year.
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The partner or partnership receives a withholding waiver from the FTB.
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The partner is a tax-exempt entity under either California or federal law.
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The distribution is exempt income.
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The partner has certified that income was previously reported on the partner’s California tax return.
Forms
The following are the required withholding forms and instructions:
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592 - Resident and Non-resident Withholding Statement (submitted to FTB by withholding agent)
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592B – Resident and Non-resident Withholding Tax Statement (provided to payees by withholding agent)
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592-PTE – Pass-Through Entity Annual Withholding Return - For taxable years beginning on or after January 1, 2020, a pass-through entity that has paid withholding on behalf of a non-resident owner or has been withheld upon must use Form 592-PTE to report the total withholding to the FTB. (The withholding agent still uses Form 592-B to provide each payee with the total amount withheld and reported for the tax year; Form 592-B is not sent to the FTB).
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FTB Publication 1017