Businesses are reminded of two important changes in the San Francisco payroll expense tax for 2017 — a decrease in the tax rate and the requirement for quarterly estimated tax payments. Additionally, 2018 is the last year of the payroll expense tax. Starting in 2019, businesses pay only the gross receipts tax.

Background

San Francisco is the only California locality that imposes a tax on payroll. The tax applies to payroll expenses attributable to services provided within the city limits.

Payroll expense is defined as compensation paid to individuals, including salaries, wages, bonuses, commissions, or property issued or transferred in exchange for the performance of services (including but not limited to stock options). Under Proposition Q, enacted in 2008, the term was expanded to include all pass-through compensation for services paid to, on behalf of, or for the benefit of owners of a pass through entity. (San Francisco Bus. & Tax Reg. Code Section 902.1(d))

The term "pass-through entity" generally includes a trust, partnership, corporation described in Subchapter S of the Internal Revenue Code , limited liability company, limited liability partnership, professional corporation, and other person or entity (other than a disregarded entity for federal income tax purposes). (San Francisco Bus. & Tax Reg. Code Section 902.21(d))

Decrease in the 2017 payroll expense tax

The Office of the Controller, City and County of San Francisco announced that for tax year 2017 the Payroll Expense Tax Rate is 0.711%, down from 0.829% for 2016. (City and County of San Francisco, Treasury and Tax Collector website)

Quarterly estimated tax payments required starting in 2017

Earlier this year, the San Francisco city council amended the city tax law to require businesses to make quarterly estimated payments for payroll expense taxes and gross receipts taxes. The change also expressly permits taxpayers to apply refunds of the business registration fee, the payroll expense tax and the gross receipts tax to subsequent tax periods. (Ordinance 26-17.)

Businesses must make quarterly estimated payments equal to 25% of the prior year or current year tax liabilities, whichever is less. Note that there is no quarterly filing form. Instead, businesses may pay online here or send the payment to San Francisco Tax Collector, P.O. Box 7425, San Francisco, CA 94120-7425.

Failure to make the required quarterly estimated payments may result in a penalty of 5% of the underpayment (however, no interest will be charged). The penalty amount will show up with the annual return due at the end of February 2018.

Note that not all businesses have a 2017 quarterly estimated tax obligation (for example, landlords with less than $1,060,000 in gross receipts are exempted from estimated tax payments and will not receive a quarterly estimated tax notice). Businesses may view their outstanding obligations here.

The online payment portal shows all of the quarterly estimated payments which have been posted to a business's account. The first, second, and third quarterly installments shall be due and payable, and shall be delinquent if not paid on or before April 30, July 31, and October 31, respectively, of that tax year. You may pay all at one time or each by their respective due dates. For example, the third quarter 2017 estimated payment is due October 31, 2017.

For more information, go here.

The fourth quarter 2017 installment, due by February 28, 2018, will be in an amount equal to the taxpayer's total payroll expense tax liability for the tax year at the 0.711% rate, less the amount of the payroll expense tax paid for the first, second, and third quarter installments. (San Francisco Bus. & Tax Reg. Code Section 6.9-3)

Payroll expense tax phases out after 2018

Beginning January 1, 2014, a Gross Receipts Tax (GRT) is phased-in over five years and the Payroll Expense Tax is phased out in proportion to the GRT phase-in. According to the GRT website, most businesses with gross receipts of not more than $1 million annually are exempt from the GRT, but are required to pay a business registration fee.

The GRT rates vary depending on the type of business and annual gross receipts from business activity in the City. After 2018, applicable businesses will be liable for 100% of the GRT, which will generally be imposed on "gross receipts" of "persons" engaged in business in the City. During the five-year phase-in period, taxpayers are expected to pay both the Payroll Expense Tax and GRT.

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EY Payroll News Flash