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California's Forced Independent Withholding Proposal

Real Estate Agent with Keller Williams

The state of California is currently looking at a forced independent withholding proposal.  This proposal will force those making payments to independent contractors to withhold 3%. This provision was included in a budget gap proposal approved earlier this week by a Budget Conference committee in the California legislature. C.A.R. opposes this FORCED OVER WITHHOLDING because it unfairly singles out independent contractors to shoulder the burden of the state's budget troubles and because it fails to address systematic problems in California's budgeting process. 

Here's how the proposal would work:

When an agent closes a transaction, they are typically paid their commission by their broker. Now, the broker would need to withhold 3% of the commission and pay it to the Franchise Tax Board (FTB). Agents would still pay their normal quarterly estimated income tax payments to the FTB in addition to the withholding. When the agent files their state income tax return the following April, they will deduct the withholdings along with the quarterly estimated tax payments from their tax liability and, in theory, receive a refund for the 3% that was withheld. This allows California to earn interest on your money! 


Sunday night and Monday morning  of this week the Assembly and the Senate approved one version of this proposal in one of the many pieces of legislation comprising the budget. However, Governor Schwarzenegger is planning to veto both sets of bills. The Legislature will need to send him new versions of the budget in order to end the stalemate.

Talking Points

While it is understood that the state is facing a substantial budget gap, increasing withholding on payments to independent contractors should NOT be one of the ways that the budget gap is addressed.  Among the arguments against this proposal:

There is no evidence that independent contractors are failing to pay their income tax obligations.  The proposed withholding requirement is merely intended to accelerate income tax payments so that the state can make money from the "float" that's earned while the funds are in its possession.

It creates significant administrative burdens for individuals that are now required to file 1099MISC information reports with the Franchise Tax Board.  Under the proposal these individuals would now need to also calculate the required withholding amount and remit that amount to the state.

There will be significant administrative costs to the Franchise Tax Board that will be faced with making refunds to those independent contractors whose withholding amount remitted to the state exceeds their income tax obligation.

How to contact your representative:



Scott Engle
Scott Engle - Realty Source, Inc. - San Diego, CA
Realty Source, Inc.

We all need to take action. This is not needed in our industry. This is an attempt for the state to earn interest on our money.......Please call your representative....Great Post!


Scott @ Realty Source

Jul 01, 2009 07:12 AM