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Failure to Withhold Liabilities for Partnership, LLC, and S Corporation Distributions

FTB Archive Disclaimer:  Archived content is not current and may contain broken links. It remains online for historical reference or research. The search function above allows you to search archived and current content separately. If you need archived content in a different format, contact us.

Purpose of bulletin

To inform staff beginning June 1, 2010, we will assess a failure to withhold liability on partnerships, limited liability companies (LLCs), and S corporations who make distributions to nonresident partners, members, or shareholders, and do not withhold or remit.

Background

California law requires partnerships, LLCs, and S corporations that have a place of business in California to withhold and remit from nonwage payments to its nonresident payees. The entities must withhold 7 percent on distributions of California source income they make to domestic nonresident payees when distributions to payees exceed $1,500 for a calendar year. They must also withhold on allocations of California source income to foreign (non-US) partners or members at the maximum California tax rate.

California Revenue and Taxation Code (R&TC) §18668 allows us to assess a liability for failure to remit withholding. A withholding agent who fails to remit or under remit is liable for the greater of:

  • The amount actually withheld, plus interest.
  • The amount of taxes due from the nonresident, but not more than the amount required to be withheld, plus interest.

California R&TC §19183 allows us to assess a penalty of $100 per payee for each informational form not filed.

What’s new?

The Withholding Services and Compliance Section’s Discovery and Compliance Team is currently reviewing cases where a Form 588, Nonresident Withholding Waiver Request,was submitted in 2007 or 2008 and denied. If no withholding was remitted for the denied partner, then a liability of 100% of the amount required to be withheld, plus interest will be assessed on the withholding agent. This will be calculated using the distribution information provided on the partnerships, LLCs, or S corporations K-1’s for the applicable tax year.

Taxpayer Inquiries

Taxpayers can call our automated line at 888.792.4900, or 916.845.4900 (if outside the United States), Monday through Friday, 8 a.m. to 5 p.m., except state holidays.

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