8422.195     REPORTABLE PAYMENT INCOME TAX WITHHOLDING 
(Renumbered and Revised 2/99)

Each state agency is responsible for federal backup withholding on reportable payments (as defined in SAM Section 8422.190) and for state withholding on all payments made to nonresidents.  Income tax will be withheld on these payments to vendors, at the rates specified, when the following federal and state requirements are met.
Federal Income Tax Withholding Requirements.
The IRC Section 3406 states that reportable payments to vendors are subject to backup withholding at 31 percent of the payment when:

1. STD. 204, (in lieu of a IRS Form W–9), has not been completed providing certification of correct TIN and exemption.  See instructions on IRS Form W–9.
2. IRS notifies your state agency that your vendor is subject to backup withholding.
3. IRS notifies your state agency that your vendor furnished an incorrect TIN.
4. Vendor fails to certify exemption from withholding on interest and dividends per IRC Section 3406(d).

State Income Tax Withholding Requirements.
Payments to nonresident vendors (except payments for equipment, supplies, and interest) are subject to withholding at seven percent.  A vendor will be considered a nonresident when the nonresident box has been checked on the STD. 204.  This form is required of all vendors doing business with any state agency.

Withholding is not required if:

1. The payments to the vendor are $1,500 or less for the calendar year.  If it is not known whether payments will exceed $1,500 for the calendar year, no withholding is required on the payment.  If it is expected that total payments will exceed $1,500 for the calendar year, withholding must be done on all payments.
2. The payment is for equipment/supplies or interest.
   The withholding rate may be reduced or waived by the FTB.  A copy of the FTB authorization must be attached to the STD. 204 or the seven percent withholding rate will apply.

If the nonresident vendor's activity will be carried on outside (or partially outside) the State of California, the FTB should be contacted at the address provided below for a reduced rate or waiver.

Computation and Remittance of Federal Backup and State Income Tax Withheld.

1. Federal Backup Withholding.
    For each vendor invoice or similar payment document that is subject to federal backup withholding in accordance with paragraph two (Federal Income Tax Withholding Requirements) of this section, the state agency shall compute the federal backup income tax to be withheld by multiplying the invoice amount (or the portion thereof subject to tax) by the 31 percent federal backup withholding rate.  This computation may be performed on the vendor invoice(s) or on a separate computation sheet which should be attached to the invoice(s) and included with the claim schedule.
   The amount computed shall be deducted from the invoice amount, the remainder shall be labeled as the claim schedule payment amount, and shall be equal to the amount shown on the related claim schedule.
   1. Remittance of Federal Backup Amount(s) Withheld.
      For each claim schedule processed, the state agency shall on a separate sheet of paper, prepare a schedule showing the claim schedule number, invoice number, payee name, the invoice amount, the amount subject to withholding, and the amount withheld.  The total amount withheld per this schedule shall be shown, as a separate line item on the claim schedule with the "Internal Revenue Service" as payee.  The Remittance Advice STD. 404, shall show the payee name and address as: Internal Revenue Service, Ogden, UT  84201.  Each state agency shall enter its FEIN, date, and amount paid in the right-hand box (reserved for vendor invoice information) of the STD. 404.  Also, the Tax Deposit Coupon, IRS Form 8109, shall be attached to the STD. 404.
   2. Reporting Federal Taxes Withheld.
       The state agency shall file the Annual Return of Withheld Federal Income Tax, IRS Form 945. Line 2 of this return reports the total amount of federal backup income tax withheld and remitted.
   3. Reconciliation of Withholding, Remittances, and Information Returns.
      Neither the IRS Form 8109 nor the IRS Form 945, provides for vendor/payee information.  That information is provided only in the Annual Information Return, Form 1099.  The IRS performs the necessary reconciliation between the IRS Form 8109, IRS Form 945, and Form 1099 data for their internal review purposes.  State agency accounting staff may perform a reconciliation, for internal use only, of the backup amounts withheld and remitted per the IRS Form 8109, and the amounts reported per the IRS Form 945, and Form 1099.
2. State Nonresident Income Tax Withholding.
    State agencies that make payments to nonresident vendors should obtain FTB Publication 1023 (Non-Resident Withholding - Independent Contractor, Rent and Royalty Guidelines) for forms and filing instructions.
    For each vendor invoice or similar payment document that is subject to state nonresident income tax withholding in accordance with paragraph three (State Income Tax Withholding Requirements) of this section, the state agency shall compute the state nonresident income tax to be withheld by multiplying the invoice amount by the standard seven percent state nonresident income tax withholding rate for nonresident vendors (or the FTB approved lower rate if applicable).  This computation may be performed on the vendor invoice(s) or on a separate computation sheet which should be attached to the invoice(s) and included with the claim schedule.
    The amount computed shall be deducted from the invoice amount, the remainder shall be labeled as the claim schedule payment amount, and shall be equal to the amount shown on the related claim schedule.

 

Updated : 7/6/2007