Withholding on Nonwage Service Payments

The University of California, Irvine is required by taxing agencies to withhold for income taxes on nonwage service payments made to non-resident individuals and entities who perform their services in the United States.

Federal Income Taxes

Specifically, the Internal Revenue Services (IRS) requires UCI, in the absence of an income tax treaty exemption, to withhold 30% for federal income taxes on nonwage service payments made to nonresident aliens or entities. Nonresident aliens are individuals who are non U.S. citizens who have not passed the substantial presence test. They are required to complete a Glacier record prior to payment in order to determine if they are eligible for an income tax treaty exemption and to ensure that the appropriate withholding are deducted. Nonresident entities can also elect to claim income tax treaty exemption by submitting the appropriate forms.

Payments subject to federal income tax withholding can include:

  • Payments to nonresident independent contractors, consultants, honoraria recipients, research participants and performers who provide or perform their services in the United States
  • Other non-wage payments of United States source income to nonresidents such as leases, rents, royalties, winnings and payouts
  • Payments for nonemployee reimbursements that do not meet UCI reimbursement policies

California Income Taxes

Separately, the California Franchise Tax Board (FTB) also requires UCI to withhold 7% for state income tax withholding on payments made to California nonresident individuals and entities. Payments that do not exceed $1,500 per calendar year are not subject to this withholding. Nonresident (foreign) entities can be exempted from the nonresident withholding by submitting CA Form 590.

California nonresidents include:

  • Individuals who are not residents of California.
  • Business entities such as corporations, partnerships or LLCs that are either not registered with the California Secretary of State to do business in California or have no permanent place of business in California.

Payments subject to state income tax withholding can include:

  • Payments to nonresident independent contractors, consultants, honoraria recipients, research participants and performers who provide or perform their services in California
  • Other non-wage payments of California source income to nonresidents such as leases, rents, royalties, winnings and payouts
  • Payments for nonemployee reimbursements that do not meet UCI reimbursement policies

Grossing Up

If necessary, departments may elect to gross up the payment to ensure that the recipient receives the full amount that they expect. Please also be aware that grossing up a payment is not necessary. The recipient will receive credit for the amounts withheld to apply against their income tax liability when they file their income tax returns. Departments that choose to gross up are responsible for the additional cost of reimbursing the taxes withheld from the payment.

Units can use the information above to determine whether or not Federal and/or California income tax withholdings are needed.

Formula

Using the formula below, you can determine the gross payment amount needed to achieve the desired after-taxes amount. For example, the additional charge on a $1,000 payment that is subject to California income tax withholding is $75.27 and is as calculated as shown below.

Additional Charge = Original Payment / (1 - tax withholding rate) - Original Payment
= $1,000 / (1 - 0.07) - $1,000
= $1,000 / 0.93 - $1,000
= $1,075.27 - $1,000
= $75.27 (Additional Cost Charged to the Department)

The gross payment amount of $1,075.27 will have taxes withheld at a rate of 7% and the net amount of the payment will come out to $1,000.