Most businesses cannot function or achieve success without a dedicated and well-trained workforce. A business’ employees are the representatives of your company and the individuals with whom the general public most commonly interacts. Experienced, well-trained employees are often the difference between a fledgling company and one that has achieved and has maintained commercial success.

While a trained and experienced workforce is often essential to a maintained commercial success, having employees is also a significant responsibility. Companies with employees incur a number of tax obligations with the most recognizable being the payroll, or trust fund, tax obligation. Taxpayers who fail to account for, hold, and pay over either state or federal payroll taxes open themselves up to serious tax consequences. This is the situation a Marina, California business owner found himself in after an investigation by the California department of Insurance and the California Employment Development Department (EDD) uncovered undeclared employees performing work for the company.

California Business Owner Faces Prison time for Payroll Tax Failures

Felipe DeJesus Olvera is the owner of La Sirenita Tree Service and was doing business under this name. Mr. Olvera had apparently contracted with a number of government agencies to perform tree trimming and other landscaping services. One of these government clients was Monterey County.

During this time, the Monterey County D.A. and the California Department of Insurance were preparing to perform a sweep to identify employers not in compliance with California state unemployment insurance requirements. A number of companies were screened by the California EDD for signs of noncompliance.  While performing work on Monterrey County property, employees of La Sirenita Tree Service were videotaped performing work and interviewed about their work.

The investigation revealed that while La Sirenita Tree Service had contracted for a workers’ compensation policy, other obligations were not satisfied. The company failed to report having any employees despite having multiple workers. Furthermore, the company failed to report or pay any payroll taxes to the state. Mr. Olvera was charged with two felony counts of making material representations to reduce his workers’ compensation insurance premium payment. He was also charged with one count of willfully failing to file payroll tax returns. Mr. Olvera pleaded no contest to all charges and likely faces a prison sentence.

What are the California State Payroll Taxes?

The state of California has four additional payroll taxes which are administered by the EDD. These payroll taxes include:

  • California unemployment insurance (UI) – The UI requirement is part of the federal unemployment insurance program. UI is paid by the employer and provides benefits to workers who are unemployed through no fault of their own.
  • Employment training tax (ETT) – ETT is utilized to improve the competiveness of California businesses by providing education and job training in targeted industries. ETT is paid by employers at the rate of one-tenth of one percent to each employee’s first $7,000 in earnings. The maximum tax for a single employee is $7.00 annually.
  • State disability insurance (SDI) – SDI provides temporary benefits to workers who have suffered a non-work related injury or other disability. SDI must be deducted from the employee’s wages by the employer.
  • Personal Income Tax (PIT) – California PIT affects individuals who work or derive income from commercial activity in the state. The EDD is charged with handling the reporting collection and enforcement of PIT withholding.

An employee’s wages are typically subject to taxation on all four payroll tax grounds. However, certain types of work may be exempt from some or all state payroll taxes. An experienced tax professional or consulting the California Unemployment insurance Code (CUIC), California Code of Regulations (CCR), and other tax manuals can reveal whether your occupation is subject to special payroll tax handling.

Homeowners with Household Employees Must Also Pay California Payroll Tax

While the payroll tax obligation is often, and perhaps typically, framed as the obligation of a business owner, the payroll tax obligation is more broadly applicable than a tax layperson might initially consider. For many taxpayers in California, it is a surprise that hiring a helper for your home can create a payroll tax obligation. That is, California taxpayers who hire household employees are also subject to the payroll tax requirement. Household hires that may create a payroll tax obligation for home owners includes:

  • Baby-sitters
  • Caretakers
  • Cooks
  • Gardeners
  • Janitors
  • Pool maintenance employees
  • Home healthcare workers

The reporting obligation arises for a household when more than $750 of work is performed in a quarter of a year. The household employer is required to submit required tax filings within 15 days of paying the requisite $750 or more in wages. Depending on the total amount paid in a quarter, the withholding requirements vary.

Facing California Tax Charges?

If you or your small business is facing a tax audit or serious charges due to a failure to satisfy the payroll tax obligation, the stakes are too high to go it alone. To schedule a reduced-rate tax consultation with tax professional, call the Tax Law Offices of David W. Klasing at 800-681- 1295 or contact us online.