BILL ANALYSIS Ó SB 1131 Page 1 Date of Hearing: June 18, 2014 ASSEMBLY COMMITTEE ON APPROPRIATIONS Mike Gatto, Chair SB 1131 (Walters) - As Introduced: February 20, 2014 Policy Committee: Revenue & Taxation Vote: 9-0 Urgency: No State Mandated Local Program: No Reimbursable: No SUMMARY This bill excludes members of a limited liability company (LLC) from the definition of an "employee" when that LLC is treated as a partnership for federal income tax purposes. FISCAL EFFECT Minor and absorbable costs to the Employment Development Department; no expected fiscal impact as any tax withholding will generally be replaced with estimated tax payments. COMMENTS 1) Purpose. Following the passage of SB 1244 (Walters) in 2010, members of LLCs that elected to be taxed as partnerships were exempted from being treated as employees for purposes of unemployment insurance, employment training tax, and state disability insurance, but not personal income tax withholding. According to the author, SB 1244 was intended to provide federal conformity for LLCs, and the exclusion of personal income tax was unintentional. The author contends the exclusion created significant confusion among taxpayers and tax practitioners. This bill would provide further federal conformity for LLC personal income tax withholding. 2) LLCs. Combining certain aspects of corporations and partnerships, LLCs are typically more flexible than corporations yet offer equivalent limited liability protection. Members of an LLC may elect to have the LLC taxed as a corporation or as a partnership, in which income of the LLC is passed through to the members in the same manner SB 1131 Page 2 partnership income is passed through to partners. By contrast, corporations are subject to corporation tax in addition to personal income tax payable by shareholders on any distributed profits. 3) Withholding vs. Estimated Tax. Under federal law, members of an LLC that elect to be taxed as a partnership are themselves treated as partners, not employees, of the entity. As a result, the LLC does not withhold personal income tax on behalf of its members, but instead those members pay quarterly estimated tax on their "partnership" income. Conforming the treatment of LLC members in California will result in any lost revenue in the form of tax withheld being replaced with additional estimated tax paid by LLC members. Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081