BILL ANALYSIS                                                                                                                                                                                                    �



                                    REVISED

                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 1131                     HEARING:  4/9/2014
          AUTHOR:  Walters                      FISCAL:  Yes
          VERSION:  2/20/14                     TAX LEVY:  No
          CONSULTANT:  Bouaziz                  

              LIMITED LIABILITY COMPANIES: INCOME TAX WITHHOLDING
          

          Excludes members of a limited liability company, treated as  
          a partnership for federal income tax purposes, from the  
          definition of employee.


                           Background and Existing Law  

          The California Limited Liability Company Act allows limited  
          liability companies (LLCs) to engage in lawful business  
          activities in the state subject to specified restrictions  
          and requirements.  LLCs provide liability protections to  
          its members similar to those provided to a corporation's  
          shareholders and members.  LLCs are 'pass-through entities'  
          and are not subject to any tax based on the entities  
          taxable income.  Rather, the items income, gain, loss,  
          deduction and credit are passed-through to the members and  
          reported on their respective income or franchise tax  
          returns.

          Under federal law, LLCs with more than one member can elect  
          to file tax returns as a partnership or a corporation.   
          Members of LLCs that elect to file taxes as a partnership  
          must file an annual return and pay estimated taxes  
          quarterly. 

          State law requires employers who pay employees  
          California-sourced income to withhold expected taxes.   
          Businesses with one or more employees in the current or  
          preceding taxable year, and who pay wages in excess of $100  
          per quarter must register with the Employment Development  
          Department (EDD).  Employers deposit personal income tax  
          withholding by mail or electronically with EDD, along with  
          amounts for Unemployment Insurance (UI), Employment  
          Training Taxes, and State Disability Insurance (SDI).  





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          State law includes members of a LLC, recognized under  
          federal law as a partnership, in the definition of  
          "employee" for personal income tax withholding purposes but  
          excludes them from Unemployment Insurance and Disability  
          Insurance withholding.  The author wants to extend the  
          exclusion for personal income tax withholding purposes to  
          treat LLC members the same at both the federal and state  
          level.

                                   Proposed Law  

          Senate Bill 1131 excludes members of a LLC, treated as a  
          partnership for federal income tax purposes, from the  
          definition of employee.  The exclusion applies only for  
          personal income tax withholding purposes.


                               State Revenue Impact
           
          No estimate.


                                     Comments
           
          1.   Purpose of the bill  .  According to the author, "In  
          2010, Senate Bill 1244 (Walters) was passed by the  
          Legislature and signed by the Governor to provide federal  
          conformity for Limited Liability Corporations (LLCs) by  
          exempting members of LLCs, taxed as partnerships, from  
          being considered employees for tax purposes involving  
          unemployment insurance (UI), employment training tax (ETT)  
          and state disability insurance (SDI).  After the passage of  
          SB 1244, concerns were raised that personal income tax was  
          unintentionally excluded from the federal conformity for  
          LLCs.  Without conformity, the Employment Development  
          Department, under most circumstances, applies common law  
          factors to an LLC member to determine which wages should be  
          withheld.  Accordingly, a member of an LLC who is treated  
          as a partnership for federal income tax purposes, is not  
          considered an employee for UI, ETT or SDI purposes, but  
          could be an employee for PIT wage withholding."

          2.   Federal Conformity  .  Federal conformity eases  
          administrative burdens placed on tax practitioners and  
          taxpayers alike, saving time and money for LLC members.   
          Under federal law, members of a LLC that elect to be taxed  





          SB 1131 -- 02/20/14 -- Page 3



          as a partnership are treated as self-employed and not as  
          employees, but state law requires personal income tax  
          withholding.  Excluding members of a LLC from the  
          definition of employee under state law would provide  
          conformity with federal law.

          3.   Legislative History.   SB 1244 (Walters), Statutes of  
          2010, Chapter 522, excluded a member of a limited  
          liability, that is treated as a partnership for federal  
          income tax purposes, from the definition of employee.  The  
          exclusion only applied for the purposes of Unemployment  
          Insurance and Disability Insurance withholding.







































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                        Support and Opposition  (04/03/14)

           Support  :  California Society of Enrolled Agents, California  
          Taxpayers Association.

           Opposition  :  None Received.