California Form 592: Common Filing Errors and How to Avoid Rejection

Mistakes on California Form 592 can lead to rejection, delays, and penalties. This form reports tax withholding on nonresidents, and errors can create compliance issues. Even minor mistakes can cause processing setbacks or additional scrutiny from the Franchise Tax Board (FTB). Identifying common pitfalls ensures a smoother filing process.

Who Must File

Form 592 must be submitted by withholding agents responsible for remitting tax on payments to nonresidents. This includes businesses, individuals, estates, and trusts withholding state tax on California-sourced income. Common filers include property managers withholding on rental income, escrow companies handling real estate transactions, and partnerships distributing earnings to out-of-state partners.

Entities paying nonresident independent contractors, entertainers, or athletes must also file if withholding applies. For example, a production company hiring an out-of-state actor for a California-based film must withhold and report the tax. Similarly, a law firm distributing partnership income to an attorney residing outside California must ensure proper reporting.

Pass-through entities such as S corporations and LLCs classified as partnerships must comply. If these entities allocate California-source income to nonresident shareholders or members, they must withhold and file Form 592. Even if a nonresident elects to be included in a group return, the withholding agent remains responsible for submitting the form unless an exemption applies.

Key Withholding Requirements

California requires withholding on payments exceeding $1,500 in a calendar year at a rate of 7%, as outlined in Revenue and Taxation Code Section 18662. This applies to compensation for services, rents, royalties, and distributions from pass-through entities. Payments below this threshold are exempt, but withholding agents must track cumulative amounts to determine if withholding becomes necessary.

Certain exemptions and waivers can reduce or eliminate withholding. Nonresident vendors with a valid California Form 590 certifying residency status are not subject to withholding. Entities expecting a lower tax liability than the standard 7% may request a reduced withholding rate by filing Form 589, which the FTB reviews based on projected income and deductions.

Withheld taxes must be remitted on time. If cumulative withholding exceeds $2,500 in a quarter, monthly payments are required; smaller amounts follow a quarterly schedule. Late payments result in penalties and interest under Revenue and Taxation Code Section 19101, calculated at the current underpayment rate set by the FTB.

Errors Causing Filing Rejection

Mistakes often stem from inaccurate or incomplete taxpayer identification details. The FTB requires a valid Taxpayer Identification Number (TIN) or Social Security Number (SSN) for each payee, and mismatches with IRS records can lead to rejection. Businesses using an Employer Identification Number (EIN) must ensure it matches the legal entity name on file with the IRS and FTB. Even minor discrepancies, such as abbreviations or misplaced punctuation, can cause delays.

Incorrect withholding amounts are another common issue. The total tax withheld must align with previously submitted payments to the FTB. If reported amounts do not match prior remittances, the return may be flagged for review or rejected. This often happens when withholding agents fail to reconcile year-to-date totals before submission. Misallocating funds across different payees or applying prior period payments to the current reporting cycle can also create discrepancies.

Submission format errors also contribute to rejection. Electronic filers must follow the FTB’s required XML schema when uploading Form 592 through the Secure Web Internet File Transfer (SWIFT) system. Formatting mistakes or failure to use designated naming conventions can cause automatic rejection. Paper filers risk rejection if they submit illegible forms, use outdated versions, or omit required signatures. The FTB periodically updates form versions, so using an obsolete form can result in non-acceptance.

New Considerations for 2025

Changes to California’s tax compliance rules in 2025 will require withholding agents to adapt to updated reporting and remittance procedures. The FTB has announced expanded electronic filing requirements, lowering the threshold for mandatory e-filing. Previously, only those exceeding $50,000 in annual withholding had to file electronically, but this threshold is expected to decrease. Smaller businesses and partnerships should prepare for this shift to avoid compliance issues.

The FTB is also increasing scrutiny on pass-through entities, particularly those with multi-tiered ownership structures. Withholding agents distributing income to nonresident partners or members must provide additional documentation to substantiate California-source income calculations. Failure to accurately allocate income subject to withholding can result in assessment adjustments and penalties. These changes align with broader efforts to prevent underreporting, especially among entities with complex income allocations spanning multiple jurisdictions.

Correcting a Rejected Submission

When a Form 592 submission is rejected, withholding agents must quickly resolve the issue. The FTB typically provides a rejection notice specifying the reason, whether it’s missing information, incorrect taxpayer identification, or discrepancies in reported amounts.

If the rejection is due to an invalid or mismatched TIN, the withholding agent should verify the number against IRS records and request updated information from the payee if necessary. If incorrect withholding amounts caused the rejection, reconciling prior remittances with reported figures is essential before resubmitting. For electronic filers, ensuring the correct XML schema and formatting is used can prevent technical rejections. Once corrections are made, the revised form must be resubmitted promptly to avoid penalties or interest assessments.

Consequences for Noncompliance

Failing to properly file Form 592 or correct a rejected submission can lead to financial penalties and increased scrutiny from the FTB. Withholding agents who do not remit the required tax on time face penalties under Revenue and Taxation Code Section 18668, which imposes a fine of up to 10% of the unpaid amount. Interest accrues daily on outstanding balances, compounding the financial burden for noncompliant entities.

Beyond monetary penalties, repeated filing errors or failure to report withholding can trigger audits and compliance reviews. The FTB has expanded enforcement efforts in recent years, particularly targeting pass-through entities and real estate transactions involving nonresidents. Businesses that consistently fail to meet withholding obligations may be required to provide additional documentation in future filings or face increased withholding rates. Ensuring accuracy in Form 592 submissions helps prevent penalties and reduces the risk of long-term compliance issues.