During our August nonprofit workshop, our nonprofit team shared the latest in accounting and tax updates, as well as insights from AICPA's recently revised Audit & Accounting Guide for Not-for-Profit Entities. We posed various questions during our workshop and over the next few blog postings, we will share the answers to those questions.
During our firm’s recent nonprofit quarterly workshop, we discussed a number of topics on both the audit and tax side. One topic in particular generated a number of questions from workshop participants: California income tax withholding. California requires that businesses and other organizations, including nonprofits withhold 7% income tax on payments of California source income to nonemployee nonresident individuals. Note that payments made to nonemployee California residents are not subject to California withholding.
Participants at the workshop asked such great questions as to what activities qualify for withholding that we wanted to summarize the applicability of withholding to various activities conducted by nonprofit organizations in this blog update. Areas that generally affect nonprofit organizations are 1) 1099 payments to nonemployee nonresident individuals, such as consultants, for services physically performed in California 2) prizes and winnings paid to nonresident individuals from fundraising activities conducted in California and 3) payments made to board members or trustees.
Payments that are Generally Subject to California Withholding
- 1099 payments to nonresident individuals for services physically performed in California. For example, an independent contractor is hired by the organization to assist with IT support and performs services both within and outside of California. The portion of the payments made to the independent contractor for the services physically performed in California, are subject to California withholding.
- The organization hosts a fundraising event in California and offers a ticket raffle with the winner receiving cash or tangible personal property. If the winner is a nonresident of California, California withholding will apply to the value of the prize awarded to the California nonresident. Note that withholding may apply to winning California residents, as well, and organizations should, generally, not sell tickets electronically to nonresidents.
Payments that are Generally Not Subject to California Withholding
- 1099 payments made to nonresident individuals for services physically performed outside of California. For example, if an investment manager hired by the organization, physically performs all of his/her services outside of California, no portion of the payment would be subject to California withholding because no portion of the services were physically performed in California.
- Payments made to nonresident board members or trustees for director/trustee services performed regardless of where the services are performed. For example, if an organization hosts a board meeting in California attended by nonresident board members/trustees and payments are made to the board member/trustees, California withholding does not apply because California has a specific exemption for these payments.
Recommendations to Nonprofit Organizations to Address California Withholding Obligations
- Organizations should take stock of all payments made to nonemployee nonresidents of California and assess whether California withholding is required.
- To the extent services are performed both within and outside of California, the portion deemed California source can be determined based on the number of days the services were performed in California to the total number of days services were performed everywhere.
- Organizations with significant prior year California withholding exposure should consult with their tax advisors to determine whether California’s Withholding Voluntary Compliance Program (“WVCP”) is a good option.
For more information on this topic, please contact Akash Sehgal at 310.873.1622 or firstname.lastname@example.org, or Richard Ruvelson at 310.873.1675 or email@example.com