Understanding California FTB 590 Withholding

Introduction

Managing residential properties in California comes with a unique set of responsibilities, especially when it involves nonresident property owners. One critical aspect that property managers must navigate is the California Franchise Tax Board (FTB) Form 590, which mandates a 7% withholding tax on certain payments. This blog aims to provide a comprehensive overview of the FTB 590 withholding requirements, including relevant civil codes and practical insights for property managers.

What is FTB 590?

FTB Form 590, also known as the Withholding Exemption Certificate, is a form used to certify an exemption from nonresident withholding. California law requires withholding of income or franchise tax on payments of California source income made to nonresidents of California. This withholding is mandated under the California Revenue and Taxation Code (R&TC) Section 18662[1].

Who Needs to Withhold?

Property managers who manage real property and collect rent or lease payments for California property owners residing outside of California (nonresident owners) are required to withhold 7% of the gross rent or lease payments exceeding $1,500 per calendar year[2]. This withholding is applicable to various entities, including individuals, corporations, partnerships, and LLCs that do not have a permanent place of business in California or are not registered with the California Secretary of State to do business in California[3].

Exemptions from Withholding

Certain property owners are exempt from the withholding requirements. These exemptions include:

1. California Residents: Individuals who reside in California.
2. Registered Entities: Corporations, partnerships, and LLCs registered with the California Secretary of State to do business in California or have a permanent place of business in the state.
3. Estates and Trusts: Estates where the deceased was a California resident at the time of death and trusts with a resident grantor, beneficiary, or trustee.
4. Nonresident Owners with Low Income: Nonresident owners whose gross payments do not exceed $1,500 in a calendar year[4].

How to Handle Withholding

As a property manager, you are responsible for withholding the 7% tax on rent or lease payments to nonresidents when the total payments exceed $1,500 in a calendar year. Here are the steps to follow:

1. Calculate the Withholding Amount: Deduct your management fees from the total rent or lease payments and calculate the 7% withholding based on the remaining amount.
2. Submit the Withholding: Withholdings must be submitted quarterly to the California Franchise Tax Board using FTB Form 592, Quarterly Nonresident Withholding Statement[5].
3. Provide Statements to Landlords: Before January 31st of the following calendar year, provide the landlord with a statement showing the total amount of income subject to withholding and the total amount withheld, using FTB Form 592-B, Nonresident Withholding Tax Statement[5].

Consequences of Non-Compliance

Failure to comply with the withholding requirements can result in penalties and interest charges. Property managers who do not withhold and remit the required taxes may be held liable for the unpaid taxes, along with additional penalties and interest[2].

Requesting a Waiver or Reduced Withholding

Nonresident landlords may request a waiver or reduced withholding from the California Franchise Tax Board. To request a waiver, landlords must submit FTB Form 588, Nonresident Withholding Waiver Request. For reduced withholding, landlords can submit FTB Form 589, Nonresident Reduced Withholding Request[5].

Relevant Civil Codes and Regulations

The withholding requirements are governed by several sections of the California Revenue and Taxation Code (R&TC) and the California Code of Regulations (CCR):

1. R&TC Section 18662: This section outlines the general requirements for withholding of income or franchise tax on payments of California source income made to nonresidents[1].
2. CCR Title 18, Section 18662-1: This regulation provides detailed guidelines on the withholding requirements, including the definition of withholding agents and the types of income subject to withholding[3].
3. CCR Title 18, Section 18662-4: This section specifies the withholding requirements for payments made to non-California business entities doing business in California[6].

Conclusion

Navigating the complexities of California’s withholding requirements can be challenging for property managers. Understanding the FTB 590 withholding rules and ensuring compliance is crucial to avoid penalties and maintain smooth operations. By following the guidelines outlined in this blog, property managers can effectively manage their withholding responsibilities and provide accurate information to nonresident property owners.

For more detailed information, property managers can refer to the official resources provided by the California Franchise Tax Board and consult with tax professionals to ensure compliance with all applicable laws and regulations.

[1]: FTB 590 Instructions [2]: Property Managers and California Withholding [3]: California Code of Regulations, Title 18, Section 18662-1 [4]: Withholding Requirements for Rent Payments in California [5]: FTB Form 592 Instructions [6]: California Code of Regulations, Title 18, Section 18662-4