Over the past few years, California’s employment laws have been in flux due to court decisions and legislation that have affected how workers are classified. Specifically, Assembly Bill 5 (AB5) has required some companies to classify their workers as employees rather than independent contractors, which will allow workers to receive a minimum wage and benefits. However, companies such as Uber and Lyft have fought against these requirements, and voters will be able to decide whether to implement a measure in the upcoming election to determine whether certain types of workers will receive an exemption from the requirements put in place by AB5.

NOTE: AB5 has very recently been renumbered as AB2257 and clarifies current definitions of employee versus independent contractor and enumerates a number of exemptions for certain industries. Prop 22 was placed on the ballot prior to this change in numbering and therefore refers to the old AB5. 

Many Americans have spent years saving money in a retirement account such as a 401(k) or IRA while planning to use this money to support themselves later in life. Retirement accounts can offer certain tax benefits, but they also provide restrictions on when these funds can be withdrawn. In times of economic hardship, account holders may wonder about their options for using these funds. Fortunately, the Coronavirus Aid, Relief, and Economic Security (CARES) Act has given those who have been affected by the COVID-19 crisis the ability to use funds in a retirement account while avoiding some of the penalties for early withdrawal.

Withdrawals and Loans from Retirement Accounts Under the CARES Act

Typically, account holders will face a 10 percent penalty (on top of any taxes that would normally apply) if they withdraw funds from a retirement account before reaching the age of 59 ½. The CARES Act has waived this tax for withdrawals of up to $100,000 made before December 31, 2020, by people who qualify for relief due to being impacted by the coronavirus pandemic. Qualifying accounts and retirement plans include 401(k)s, IRAs, 403(b)s, and profit-sharing plans.

A recent U.S. Supreme Court case has prompted California legislators to change a state use tax law that affects out-of-state sellers. Under the new law, some retailers outside of California must register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax.

The law applies to remote sellers who have total sales of $500,000 in tangible personal property for delivery in California in the preceding or current calendar year. The law went into effect on April 1, 2019, so these sellers are required to collect and remit taxes on sales which occurred on or after this date. 

Examples of out-of-state sellers that may be affected by this change include online merchants, mail-order catalogs, or telephone salespeople. Retailers with a physical presence in California will continue to have the same registration and use tax obligations as before the new law was passed.

California employers are responsible for withholding payroll taxes, filing returns, and paying state and federal payroll taxes. The laws governing payroll taxes are complex, and as your small business grows, the onerousness of compliance with these tax rules will intensify.

What Are Payroll Taxes?

California has four state payroll taxes. Two are paid by the employer: Unemployment Insurance (UI) and Employment Training Tax (ETT). Two are withheld from workers’ wages: State Disability Insurance (SDI) and Personal Income Tax (PIT). Payroll taxes are administered by the Employment Development Department (EDD).

In addition, employers must handle federal payroll taxes. A small business will be required to pay federal taxes for Medicare, Social Security, and unemployment (FUTA). Also, an employer withholds federal personal income taxes, Medicare, and Social Security from workers’ wages.

Limited liability companies (LLCs) are often touted for their tax flexibility. In fact, that is one of the reasons why people choose to set up their business as an LLC.

LLCs are commonly called pass-through tax entities for federal income tax purposes. This is because the LLC will not be responsible for these taxes. Instead, the LLC’s individual members will pay the federal income taxes.

However, LLCs must comply with certain filing requirements and possibly pay a state minimum tax in California and may need to pay a California LLC fee. The proper forms and amount of taxes and fees will be determined by the setup of the LLC and also by certain elections made.