BILL ANALYSIS                                                                                                                                                                                                    �



                                                                  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