October 9, 2018 San Francisco payroll expense tax rate for 2018 released; tax will continue rather than be phased out after 2018 The San Francisco Office of the Controller, City and County of San Francisco announced that for tax year 2018 the Payroll Expense Tax Rate is 0.38%, down from 0.711% for 2017. (City and County of San Francisco, Treasury and Tax Collector website) 2018 was to be the last year of the payroll expense tax when starting in 2019, businesses were to pay only the gross receipts tax. However, the agency has since announced that because "gross receipts tax revenue has been less than expected, the payroll expense tax will apply for future tax years as well," rather than be 100% phased out by the gross receipts tax as promised. According to an agency representative, it is unknown at this time how many more years employers will be required to pay the payroll expense tax. Background San Francisco is the only California locality that imposes a payroll expense tax. 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)) Quarterly estimated tax payments required Beginning in 2017, 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 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 2019. Note that not all businesses have a 2018 quarterly estimated tax obligation (for example, businesses with less than $1,120,000 in gross receipts or payroll expense tax of less than $300,000 are exempted from estimated tax payments and will not receive a quarterly estimated tax notice). Businesses may view their outstanding obligations online. The online payment portal shows all of the quarterly estimated payments that 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 2018 estimated payment is due October 31, 2018. The fourth quarter 2018 installment, due by February 28, 2019, will be in an amount equal to the taxpayer's total payroll expense tax liability for the tax year at the 0.38% 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 will not phase out after 2018 Beginning January 1, 2014, a Gross Receipts Tax (GRT) was phased-in over five years and the Payroll Expense Tax was to be phased out in proportion to the GRT phase-in. According to the agency website, most businesses with gross receipts of not more than $1,090,000 for 2018 are exempt from the GRT. The 2012 Gross Receipts Tax Ordinance set the GRT to phase in gradually over time. In 2014, gross receipts rates were 10% of the voter approved maximum, rising to 25% in 2015, 50% in 2016, 75% in 2017, and 100% in 2018. The tax change was designed to be revenue-neutral: revenue raised by the new gross receipts tax would be used to retire the payroll expense tax. The Controller's Office was directed to compute the payroll expense tax rate during the phase-in period, using formulas in the ordinance. However, the agency has since announced that because "gross receipts tax revenue has been less than expected, the payroll expenses tax will apply for future tax years as well," rather than be 100% phased out by the gross receipts tax as promised. 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. Small businesses are exempt from the Gross Receipts Tax for 2018 if their combined taxable gross receipts in the City is less than $1,090,000 (less than $300,000 to be exempt from payroll expense tax). Businesses completely exempt from both the Gross Receipts Tax and Payroll Expense Tax do not need to file an annual return. Those exempt from only one of the taxes must complete annual returns and enter zeros for the tax from which they are exempt. For a guide to computing the gross receipts and payroll expense taxes go here. ———————————————
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