San Francisco levies a 0.38% payroll expense tax (a tax on payroll expense) on all persons engaging in business within the city whose annual payroll expense exceeds $300,000.
The Payroll Expense Tax is filed as part of the Annual Business Tax Return.
The term "Payroll Expense" is defined in Section 902.1 of the Business and Tax Regulations Code, and generally includes but not limited to the compensation paid to, on behalf of, or for the benefit of an individual, including shareholders of a professional corporation or a Limited Liability Company ("LLC"), including:
- property issued or transferred in exchange for the performance of services (including but not limited to stock options)
- compensation for services to owners of pass-through entities
- An organization having a formally recognized exemption from income tax pursuant to sections 501(c), 501(d), or 401(a) of the Internal Revenue Code (the “IRC”), as qualified by sections 502, 503, and 504 of the IRC. However, organizations (other than organizations described under section 501(c)(3) of the IRC) directly engaged within the City in an unrelated trade or business within the meaning of section 513(a) of the IRC that have, from their own operations, unrelated business taxable income within the meaning of section 512(a)(1) of the IRC, do not qualify for this complete exemption.
- Skilled nursing facilities licensed under the provisions of Title 22, California Administrative Code, Division 5, Chapter 3.
- Banks and financial corporations exempt from local taxation under Article XIII, Section 27 of the California Constitution and Revenue and Taxation Code section 23182.
- Insurance companies exempt from local taxation under Article XIII, Section 28 of the California Constitution.
- Persons engaging in business as a for hire motor carrier of property under Revenue and Taxation Code section 7233.
- Persons engaging in intercity transportation as a household goods carrier under Public Utilities Code section 5327.
- Charter-party carriers operating limousines that are neither domiciled nor maintain a business office with the City under Public Utilities Code Section 5371.4.
- Any other person upon whom the City is prohibited under the Constitution or statute of the United States or under the Constitution or statute of the State of California from imposing the Payroll Expense Tax.
Any person that grants a service provider a right to acquire an ownership interest in exchange for the performance of services shall include in its payroll expense for the tax year in which such right is exercised an amount equal to the excess of (i) the fair market value of such ownership interest on the date such right is exercised over (ii) the price paid for such interest.
Any individual compensated in his or her capacity as a real estate salesperson or mortgage processor shall be deemed an employee of the real estate broker or mortgage broker for whom such individual performs services, and any compensation received, including compensation by way of commissions, shall be included in the payroll expense of such broker. Section 902.1 (c)
All compensation, including all pass-through compensation for services paid to, on behalf of, or for the benefit of owners of a pass through entity, shall be included in the calculation of such entity's payroll expense tax base for purposes of determining such entity's payroll tax liability. The "pass-through compensation for services" of a pass-through entity shall be the aggregate compensation paid by such entity for personal services rendered by all such owners, and shall not include any return on capital investment. The taxpayer may calculate the amount of compensation to owners of the entity subject to the Payroll Expense Tax, or the taxpayer may presume that, in addition to amounts reported on a W-2 form, the amount subject to the payroll expense tax is, for each owner, an amount that is two hundred percent (200%) of the average annual compensation paid to, on behalf of, or for the benefit of the employees of the pass-through entity whose compensation is in the top quartile (i.e., 25%) of the entity's employees who are based in the City; provided, the total number of employees of the entity based in the City is not less than four.
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