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Posted by Tony Cox on December 8, 2006, 2:07 am
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>> And exactly how is a small business (or large one for that
>> matter) supposed to comply? I now run a small consulting
>> firm out of Nevada and we're considering sending employees
>> (including myself) into CA. How is one supposed to withhold
>> and report? How much of the income would be attributable to
>> CA? Pro-rate salary according to the number of days worked
>> (say 5/7 th's of the base salary for each week)? Would it be
>> considered acceptable to lower ones salary for the duration
>> of a contract (unlikely to be longer than 3 months) to
>> minimize CA taxes (as an owner, I do have that flexibility
>> at least for myself)? What about liability for such add-ons
>> as CASDI, for which the payee can never receive any benefit?
> By sending your employees to perform services in California,
> your business, however it is organized, becomes a California
> taxpayer, subject to all applicable California tax laws.
> Since you are an employee, I presume your business is a
> corporation (S or C), since an LLC or partnership would not
> compensate you as an employee. The corporation must
> register with the California Secretary of State (qualify to
> do business in the state) and will be subject to the
> corporate franchise tax, including the $800 minimum.
Yes, we are a C corp, and we have in the past registered as
a foreign corporation so we know all about that $800. We
also know how aggressive they get if you forget to
"deregister" when you've finished.
But that was to perform services in Nevada for a CA client,
rather than actually performing them in CA. Correct me if
I'm wrong, but CA businesses are supposed to withhold 7%
from payments to out-of-state service providers who aren't
qualified to do business there, but most in my experience
have no idea this is required. We just try to do the right
thing in an evil world.
Now we'll need to be physically in CA, we have to deal with
the EDD as well. Employees will be there 3-5 days per week,
returning home on the weekend. Since I believe CA "de
minimus" allowance is < 5days over a whole year, there seems
no way of *not* dealing with this.
> It must also register as an employer with California and
> withhold California individual income tax from its
> employees' salaries to the extent they represent
> compensation for services performed in California.
Well, that's rather the point, isn't it? Exactly how does
one apportion "compensation for services performed in CA"
for someone on a salary? Typically, we'd bill the client
based on that person's time card, but the salary that the
employee receives isn't related in any way to to that time
card. So how does that get apportioned? We might even "fixed
bid". Does that make a difference?
I can guess at several mechanisms one might use, and clearly
I'm going to select that which is most favourable to
minimize CA tax liability. Why not?
One way would (for me) be to divide hours worked in CA into
my usual 80-hour week. Would that be acceptable? Would I
need timesheets covering all I do in those 80 hours in case
of audit?
Another would be to look at what the labor department thinks
someone ought to be paid in a particular role, but that's
likely to be far higher than salary received in NV for
equivalent work, and their figures are notoriously
inaccurate anyway.
Is there case law where someone has had an apportionment
scheme challenged and overturned?
> For unemployment insurance purposes each employee is
> reported to one, and only one, state, regardless of how many
> states he or she works in during the year. If most of an
> employee's services are performed in Nevada, the employee
> should be reported to Nevada for unemployment insurance
> purposes, not California.
That's good to know. Our experience rate in NV makes
this insignificant. What about SDI?
> As for reducing your own salary during the time you're
> working in California ... does that smell right to you??
Sure. I'm enjoying the beach in my off-hours, rather than
sweltering in the desert. I no longer need my "hot weather
salary allowance". And as long as I'm being paid more than
minimum wage, who gives a fig? Or to put it more
specifically, has the EDD ever given a fig enough to
challenge such an arrangement in tax court and established a
precedent?
>> Are states like CA likely to be happy to receive any income
>> at all, or are they likely to dig their heels in when one
>> pops up on their radar screens and go for the jugular.
>> Having dealt with the CA state board of equalization before,
>> I think I'm not likely to be thrilled with the answer.
> If the returns come up for audit, they'll be audited.
Yes, well. It's all risk management after all. Clearly,
several major universities and a whole load of small to mid
size job shops have decided that simply ignoring the whole
deal is the optimum approach. Presumably CA know all about
this. Presumably, too, aggressively auditing firms that
*are* at least going through the motions of compliance is
not in CA's long term interest. I suppose I'm naive to
expect clarification in a public forum.
BTW, if selected for audit, are you supposed to high-tail it
over to Sacramento, or does the auditor (like the angel of
death) come and visit you? And if one is no longer
registered as a foreign corporation in CA when the audit
occurs, what mechanisms are there for getting a tax
adjustment for the expense of compliance?
> As for SBE auditors, though, in my (admittedly limited)
> experience they are easier to deal with than Nevada
> auditors. Those guys are like junkyard dogs <G>!
Nevada has changed quite a few things about its tax system
recently & invented a whole new business license requirement
with draconian penalties that small businesses always forget
about. I put it down to all the Californians moving here and
trying to make the place feel like home!
We even have our own "stealth" income tax now. Thank
you CA!!!
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