In California, the taxation of settlement proceeds and judicial awards is crucial.
Usually, in California, when a government entity settles a case and needs to pay a plaintiff subject to tax implications, the defendant government entity will likely ask the plaintiff to complete Form 587.
Form 587, or the Nonresident Withholding Allocation Worksheet, is a form in California that determines the need for withholding and calculates the amount of California source income subject to withholding. This brief overview will assist you in grasping the details of Form 587, including its relevance to QSFs and any exceptions that apply.
What does Form 587 refer to?
Form 587 is a form that out-of-state Qualified Settlement Funds (QSF) in California must fill out and sign before receiving any payment from a governmental entity.
When should Form 587 be filled out?
When making payments for settlements or court awards to QSFs acting as the payees, the governmental party responsible for withholding the payment typically the governmental entity requires Form 587 to be completed, signed, and sent back before processing the payment.
Essential Details, for Form 587
Based on Section 18662 of the California Revenue and Taxation Code (R&TC), it is mandatory to withhold seven percent (%) of income or franchise tax on payments to nonresidents for income earned from California sources unless the Franchise Tax Board (FTB) approves a waiver or reduction. Nonetheless, a Qualified Settlement Fund sitused outside of California can circumvent the seven percent (7%) withholding requirement, simplifying QSF administration.
Other options
Suppose a person from another state or country working in California wants to avoid having money withheld from their payments for tax purposes. In that case, they can fill out form 588 and ask for a waiver of withholding taxes or fill out form 589 to request an amount to be withheld instead of using form 587 by ticking the exception box stating that their work is entirely outside California is often the easiest and fastest way based on past cases.
The necessity of submitting a California Form 587
While a Qualified Substitute Form may not be subject to withholding, per Form 587 rules, the form still needs to be submitted without fail.
Another rationale for utilizing a Qualified Settlement Fund
If the plaintiffs live in California and use Form 587 for a QSF, they can prevent the withholding mentioned in taxable settlements and address any concerns government entities raise regarding the structure.
In closing
Form 587 determines whether withholding is necessary and how much income should be subject to withholding taxes. QSF, such as the ones set up by QSF 360 from Eastern Point Trust Company, are formed outside of California and are, therefore, not subject to withholding taxes in CA.
Understanding Form 587 can assist in avoiding California state withholding taxes when transferring funds into a Qualified Settlement Fund.
Compliance with state and federal tax laws are always important always seek the advice of a competent tax and legal professionals before taking any actions.