This is Part 3 of an ongoing series designed to provide California corporations general information on how to maintain their corporate standing. In this edition, we will review observance of corporate formalities.
Employer Tax and Withholding Responsibilities. As an employer, you will be responsible for certain employer taxes. In some cases, you will have to pay the tax directly. In other cases, your employees pay the tax, but you are responsible for withholding the tax payment from their wages and making periodic deposits of these funds in an authorized bank. See
IRS Circular E, Employer's Tax Guide and Tax Guide for Small Businesses, both available from the IRS.
Federal TaxesWage Withholding. You must withhold federal income tax from the taxable wages paid to your employees. You will need to obtain from each employee a properly executed Employee Withholding Allowance Certificate (IRS Form W-4). Before January 31, following the close of each calendar year, you must provide each employee with an annual Wage and Tax Statement (IRS Form W-2).
Social Security Taxes (FICA). Social security taxes are imposed on both employers and employees. You must withhold FICA taxes from each employee's wages and pay a tax equal to the amount paid by each employee.
Return and Deposit of Taxes. With some exceptions, employers subject to either income tax withholding or social security taxes must file a quarterly return of federal Form 841 and must deposit the income tax withheld and the FICA taxes with an authorized commercial bank depositary or a Federal Reserve Bank or branch. IRS Circular E will explain when the required deposits must be made.
California TaxesWage Withholding. As a California employer, the corporation must withhold California income tax from the taxable wages paid to employees and must deposit these funds with the state. The process is similar to that for federal income taxes.
California Unemployment Insurance Tax. A California employer is generally subject to an unemployment insurance tax on the taxable wages paid to its employees. The corporation must register at the California Employment Development Department within 15 days after paying $1000 of taxable wages during a calendar quarter. This tax is imposed on the employer, not on the employees.
California Disability Insurance Tax. Although California employees are subject to this tax, the employer has the responsibility of withholding the tax from the wages paid to such employees. However, the employer has the alternative of establishing a state-approved private disability insurance coverage plan. If this option is chosen, employees may be required to make contributions directly to this plan in lieu of the tax payment.
General Considerations. The corporation's responsibilities to pay employment taxes, to withhold taxes imposed on its employees, to file tax returns, and to make periodic tax deposits are substantial. Penalties for noncompliance can be severe: CORPORATE OFFICIALS CHARGED WITH TAX-WITHHOLDING RESPONSIBILITIES MAY BE PERSONALLY LIABLE FOR 10 PERCENT OF THE UNPAID TAXES AND ALSO FOR ANY TAX PENALTIES IF THEY NEGLECT THEIR RESPONSIBILITIES. If you have not already done so, we suggest that you consult your accountant promptly to develop proper tax accounting procedures so that timely tax payments are made.
California Sales and Use TaxesPermit Requirement. All parties engaged in the business of selling tangible personal property as retail in California must obtain a seller's permit form the California State Board of Equalization. As a practical matter, a permit is usually required even though the corporation sells such tangible personal property at wholesale. A separate permit must be obtained for each retail business location and must be conspicuously displayed. A substantial security deposit of up to a maximum of $10,000 may be required. A business having a seller's permit can purchase tangible personal property for resale without having to pay sales tax to the seller, provided it gives the seller a signed resale certificate in a form prescribed by the State Board of Equalization.
Tax Payment Requirements. If a corporation sells tangible personal property at retail in California, it will be subject to the California sales tax unless the property sold is specifically exempted. California also imposes a "use tax" on most retail purchases that occur outside of California but are intended for use within California. Any retailer engaged in business in California is required to collect the sales and use taxes and remit them to the state. A retailer is deemed to be "engaged in business" in California if it has any kind of an establishment in the state or if it has representatives operating in any kind of sales activity in the state. This law applies whether the retailer is involved directly or through a subsidiary or agent.
The holder of a seller's permit must file sales and use tax returns and pay or prepay the taxes collected, generally on a quarterly basis. The corporation should promptly consult its accountant regarding the dates on which these returns must be filed.
Personal and Real Property Taxes. The corporation must pay annual property taxes based on the value of the taxable real and personal property it owns or possesses on the immediately preceding March 1 (lien date). Usually, this tax is paid to the county assessor of the county in which the property is located. The county has a priority tax lien on the property as of the lien date, which is removed by the payment of this tax.
If the corporation owns taxable personal property with a cost of at least $30,000, it must file each year, on or before the date designated by the County Assessor (usually between April 1 and the last Friday in May), a written property statement. In cases in which the cities do their own assessing, a separate written property statement should be filed with the city. If the corporation owns taxable personal property costing less than $30,000, it must file a written property statement only on the County Assessor's request. Real property taxes are payable in two installments, the first due before April 10th and the second due before December 10th of each year. Personal property taxes must be paid by the due date specified in the County Assessor's notice.
You should consult your accountant for advice regarding filing property tax statements because there are substantial penalties for late payment and there are numerous special provision (e.g., an exemption for "intangibles"). This area is very complex, and competent accounting advice is essential to ensure full compliance.
Other Taxes. Depending on the nature of your business, there may be special taxes imposed by federal, state, or local governments, such as those on alcohol, tobacco, gross receipts, and real estate transactions. Your accountant should be able to assist you in preparing the proper tax forms and in making the necessary tax payments.
The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.
