BILL ANALYSIS
SB 1244
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Date of Hearing: June 23, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 1244 (Walters) - As Amended: May 17, 2010
SENATE VOTE : 33-0
SUBJECT : Employment taxes and contributions: limited liability
company
SUMMARY : Defines "employee", in connection with payroll tax
collections, as any member of a limited liability company (LLC)
that is treated as a corporation, and excludes any member of an
LLC that is treated as a partnership for federal income tax
purposes. Specifically, this bill :
1)Defines "employee" as any member of a limited liability
company that is treated as a
corporation for federal income tax purposes, in connection with
the collection of taxes and contributions for the funding of
unemployment insurance, employment training, state disability
insurance, and personal income taxes.
2)Specifies that "employee" excludes any member of a limited
liability company that is treated as a partnership for federal
income tax purposes.
3)Provides that "wages" includes compensation that is deductible
under the U.S. Internal Revenue Code and paid to a member of a
limited liability company filing a federal corporate income
tax return.
EXISTING LAW :
1)Requires employers to withhold taxes or make contributions for
purposes of unemployment insurance, employment training, state
disability insurance, and personal income taxes based on the
"wages" and contract earnings of "employees."
2)Defines "wages" as the remuneration for services performed by
the employee for his or her employer.
3)Defines "employee" as any individual who, under the usual
common law rules applicable in determining the
SB 1244
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employer-employee relationship, has the status of an employee.
The main factor in the common law rule is if the employer has
the right to control the manner and means of accomplishing the
results desired.
4)Includes in the definition of "employee" any officer of a
corporation.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose. The purpose of this bill is to conform the state
Unemployment Insurance Code to federal regulations on Limited
Liability Companies (LLCs) so that LLCs may offset federal
unemployment insurance tax (FUTA) costs.
2)Background. The current Unemployment Insurance Code does not
recognize the existence of LLCs and, therefore, the Employment
Development Department (EDD) is not authorized to treat an LLC
as a corporation or as an employer with "employees" for whom
payroll taxes are to be collected.
The existing provisions of the Unemployment Insurance Code can
pose a significant challenge to LLCs, as this opens them up to
full FUTA liability, whereas in other states LLCs are able to
offset FUTA liability through the payment of their state
unemployment insurance taxes. Most business accounting
software assumes that such an offset occurs, also placing
California LLCs in a difficult position. This bill proposes
to complete the previous efforts to conform California's laws
with the federal tax law governing LLCs.
3)Prior legislation. SB 1234 (Alpert), Statutes of 1997,
Chapter 608, conformed the Revenue and Taxation Code to
federal regulations regarding LLCs and the payment of personal
income taxes.
AB 1703 (Leach), Statutes of 1998, Chapter 243, conformed the
Corporations Code to federal regulations regarding LLCs and
their partnership interests.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Society of Enrolled Agents
Opposition
None received.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086