BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Senator Ben Hueso, Chair
Date of Hearing: March 26, 2014 2013-2014 Regular
Session
Consultant: Gideon L. Baum Fiscal:Yes
Urgency: No
Bill No: SB 1131
Author: Walters
As Introduced/Amended: February 20, 2014
SUBJECT
Income tax: withholding: limited liability company.
KEY ISSUE
Should the Legislature conform Personal Income Tax (PIT)
withholding with Unemployment Insurance (UI) and Disability
Insurance (DI) withholdings for members of Limited Liability
Companies (LLCs)?
ANALYSIS
Existing law defines, for the purposes of Unemployment Insurance
taxation, an employer as an employing unit, which for some
portion of a day, has within the current calendar year or had
within the preceding calendar year employed one or more
employees and pays wages for employment in excess of one hundred
dollars ($100) during any calendar quarter. (Unemployment
Insurance Code �675)
Existing law requires employer contributions to the Unemployment
Fund shall accrue and become payable by every employer for each
calendar year with respect to wages paid for employment. The
contributions cannot be deducted in whole or in part from the
wages of individuals in his employ. (Unemployment Insurance
Code �976)
Existing law excludes from the definition of "employee" any
members of a Limited Liability Companies recognized under
federal law as partnerships. This exclusion only applies for
the purposes of Unemployment Insurance and Disability Insurance
withholding .
(Unemployment Insurance �623)
This bill would extend the above-discussed exclusion to Personal
Income Tax (PIT) withholding for Limited Liability Companies
that are recognized as partnerships by the federal government.
COMMENTS
1. Need for this bill?
Limited liability companies are a business structure that
combines elements of partnerships and corporate business
structures. The LLC is well structured for sole proprietors
and partners, and, as the name suggests, serves to limit
liability. From a federal taxation perspective, LLCs are
treated as pass-through or "disregarded entities" - a single
owner would treat profits as their own income, or multiple
owners would file as a partnership, but the LLC itself does
not file taxes.
Instead, an LLC elects how they wish to be taxed with the IRS
by depending on the ownership structure in place. One of
these possible elections is as an "S" corporation. An "S"
corporation can have 1-100 shareholders, and all profits and
losses are passed on directly to these individuals. With both
"S" corporations and LLCs, the Internal Revenue Service (IRS)
requires that a "reasonable compensation" be paid to all
shareholders - the assumption is that no one works for free.
In 2010, the Legislature passed SB 1244 (Walters), which
excluded LLC members from the definition of employee for the
purposes of remitting Unemployment Insurance and Disability
Insurance taxes. At that time, PIT remittances were not
included. SB 1131 would extend an identical provision to
Personal Income Tax (PIT) remittances, freeing the LLC from
the responsibility of remitting PIT to EDD for its members.
Hearing Date: March 26, 2014 SB 1131
Consultant: Gideon L. Baum Page 2
Senate Committee on Labor and Industrial Relations
2. A Brief Discussion on SB 1131 and the definition of
"Employee":
Generally speaking, statutory definitions of who is and who is
not an employee forms one of the prime fault lines of the
Committee's jurisdiction, as one's designation as an employee
triggers a series of labor law protections that form the
fundamental foundation of California law. These protections
include the 8 hour day, overtime, workers' compensation, and
many, many others.
SB 1131, however, falls outside of this classical rubric. SB
1131 deals with tax remittance for LLC members, many of which
would already be considered outside of the purview of the
definition of an "employee". Moreover, common law definitions
of who is or is not an employee for the purposes of overtime
and workers' compensation would still govern for the purposes
of California labor law enforcement. In short, the impact on
SB 1131 is largely fiscal, rather than labor, related.
3. Double-Referral to Senate Committee on Governance and Finance:
This bill has been double referred and, if approved by this
committee, it will be sent to the Senate Governance and
Finance Committee for a hearing.
4. Proponent Arguments :
The California Society of Enrolled Agents (CSEA) notes that
California law currently conforms to the federal law by
exempting members of LLCs taxed as partnerships from being
employees for UI (unemployment insurance), ETT (employment
training tax) and SDI (state disability insurance) tax
purposes. However, PIT (personal income tax) was excluded
from the federal conformity. CSEA argues that the result has
been confusion for tax practitioners and taxpayers alike. CSEA
argues that SB 1131, by conforming PIT remittance to existing
state law, will enable better compliance with the tax code,
Hearing Date: March 26, 2014 SB 1131
Consultant: Gideon L. Baum Page 3
Senate Committee on Labor and Industrial Relations
which is better for the state and California taxpayers alike.
5. Opponent Arguments :
None on file.
6. Prior Legislation :
SB 1244 (Walters), Statutes of 2010, Chapter 522, was
discussed above.
SUPPORT
California Society of Enrolled Agents (CSEA)
OPPOSITION
None on file.
Hearing Date: March 26, 2014 SB 1131
Consultant: Gideon L. Baum Page 4
Senate Committee on Labor and Industrial Relations