BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 1244 (Walters) Hearing Date: 5/10/2010 Amended: 5/4/2010 Consultant: Bob Franzoia Policy Vote: L&IR 6-0 _________________________________________________________________ ____ BILL SUMMARY: SB 1244 would do the following: - Include within the definition of employee for the purposes of employment taxes, any member of a limited liability company (LLC) that is treated as a corporation for federal tax purposes. - Specify that the definition of employee does not include any member of a LLC that is treated as a partnership for federal income tax purposes. - Provide that wages include compensation paid to a member of a LLC who files a federal income tax return. By expanding the base of wages subject to unemployment insurance taxes, this bill would deposit additional moneys into the Unemployment Fund, a continuously appropriated fund, thereby making an appropriation. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Unemployment Insurance Negligible increase in revenue annuallySpecial* Code clarification * Unemployment Fund _________________________________________________________________ ____ STAFF COMMENTS: A LLC can elect how it is to be taxed by the Internal Revenue Service (IRS) depending on the ownership structure in place. One of these possible elections is as a corporation. With both corporations and LLCs, the IRS requires that a reasonable compensation be paid to all shareholders. The IRS and the Franchise Tax Board (FTB) treat LLCs as a sole proprietorship, partnership, or corporation depending on the circumstances. The Unemployment Insurance Code requires the Employment Development Department (EDD) to treat the LLC as a unique entity type, instead of using the IRS/FTB methodology. Because EDD is unable to treat LLCs as a corporation, LLCs are not employers in the traditional sense, they do not have employees and they do not pay unemployment insurance taxes. The purpose of this bill is to conform the Unemployment Insurance Code to federal regulations on LLCs so they may offset federal unemployment insurance tax costs. Generally, this bill will result in a minor increase in the number of persons subject to employer taxes paid into the Unemployment Fund. It would have no impact on any employees of LLCs, only LLC members who are managing and non managing members.