At least California is generous enough to require at least 25% of payroll. Most states, if you have even a single employee in that state you need to register as a business in that state (and pay associated filing fees and taxes).
This isn't really news. 15 minutes of reading about staring an LLC in Deleware and you'll find you have to register in the state you live as well - so it shouldn't be a shock you have to file in places you have employees.
1099 is definitely the way to go for as long as you can - people still get social security credit.
Words of advice, though, if the business is in CA don't hire contractors via 1099 unless the work really does fall under the legal definition of what a 1099 can be used for (in CA). If they appear to be an employee, in any way, then they should be an employee. The CA EDD loves auditing and assessing back taxes and fines. And all it takes is a disgruntled contractor to call the EDD.
>And all it takes is a disgruntled contractor to call the EDD.
Less than that! In the event of a random audit, they will aggressively try to reclassify 1099 contractors that have no interest in being employees and don't meet the definition in any way.
They probably only go after those in the US as they can garnish bank accounts at banks that they can reach as they currently do to Arizona businesses they claimed were doing business in California...
"Making matters worse, if California’s tax assessments are not paid voluntarily, California frequently further tramples on the sovereignty of other states by issuing orders to interstate banks, demanding that they transfer funds in Arizona-based accounts for back payment. Those seizure orders threaten the banks that, if they do not transfer the funds, California will take the taxes and penalties owed from the banks instead. Not surprisingly, the banks almost uniformly consent to California’s strong-arm tactics.
Exhibit G in the filing provides an example where California demanded that Wells Fargo not only transfer the $800 tax, but also a $200 “demand penalty,” a $432 “late filing penalty,” a $79 “filing enforcement fee,” and $63.40 in interest, for a “Total Tax, Penalties, Interest and Fees” of $1574.40."
IANAL, but if you are building a software product, and you hire someone to do software development work on your core product, then CA may easily take the view that person is an employee because of the ABC test (as of September 2019).
The ABC test itself may be simple (though rule B seems open to interpretation as to what it means to " ...perform work that is outside the usual course of the hiring entity's business."), but figuring out where the ABC test applies is not simple; they quickly realized that applying this test across the board would completely decimate a bunch of legitimate industries, and so they carved out a wide swathe of exceptions.
Software consulting probably (IANAL) falls under "Business to business consulting", at least if you structure your consulting shop correctly. If you're just working long-term full-time for one client and not offering your services up elsewhere as the GP's case describes, you're probably mis-classified under the ABC rule.
Isn't a plumber just someone providing a service - not an independent contractor? Like if I did 20000K of work with that plumber, I'm not sending a 1099.
Yes, but at scale and in a lawsuit, the court will look at the totality of the situation.
Many companies hire through staffing companies, rather than hiring 1099s directly. But when the contracting company only provides a service to you, and their 1099s are only contracted to your offices, you may find that the employees of this other company are considered to be employees of your company instead. Courts can decide to pierce these abstractions. The most notable example is the Microsoft permatemp lawsuit: https://en.wikipedia.org/wiki/Permatemp
If your company has so much piping that the local plumber hires staff dedicated to you for years on end, then it's conceivable that a court would decide that the plumbing company's employees are actually your employees.
Personally, I've always wondered whether government contractors could win a lawsuit to be considered government employees. The US government is by far the biggest "permatemp" employer and seems to itself regularly flout these kinds of laws.
>Personally, I've always wondered whether government contractors could win a lawsuit to be considered government employees. The US government is by far the biggest "permatemp" employer and seems to itself regularly flout these kinds of laws.
Maybe if this nonsense was actually addressed and made strict, the US government would finally be forced to provide just compensation for it's employees instead of always just shoving piles of money at external contractors and allowing untold grift
Businesses (or individuals hiring service providers on behalf of their business activities) are required to provide 1099s. 1099s are not provided for services provided for non-business reasons.
Just FYI, the California EDD has some absolutely ridiculous ideas on what qualifies someone as an employee vs 1099 contractor that extend well beyond what the IRS considers, and frankly, well beyond their own written law in the event of an audit. They audit extensively and intrusively on that issue as well.
I’d say the opposite, that businesses large and small have perverted the concept of “independent contractor” to just mean “lower class worker we can pay less & treat as disposable.”
Thats not to say there isn't tons of “real” contractor work available to people who actually work independently.
But it only takes like 5 minutes to read the IRS 20 factor test and it pretty much immediately makes it clear what’s a “real” contractor relationship and what isn’t. IMO people running a serious business shouldn’t have a problem doing the most basic research to make the determination.
To be super clear, California’s ABC test is only 3 factors and it codifies that those 3, which are already in the IRS test (A is 1, B is 3 & C is satisfied by 17 or 18). It mandates that these 3 (out of the 20 supplied by IRS) in particular must be present, clearing up the existing rules.
What you just said is almost a verbatim summary of what my naive understanding was before watching my business partner undergo an EDD audit earlier this year where I myself was scrutinized heavily and interviewed by the EDD, having done some 1099 work for this guy. (And, the audited year was actually BEFORE the CA ABC test came into effect.)
What I'm trying to communicate is that this understanding will NOT sufficiently protect you from the CA EDD. It goes MUCH deeper than the above and they have no problem making assertions that probably would not stand up in court if you hired a tax attorney, but they don't really care.
The P&I clause simply means that states can't discriminate against people from other states. This was explicitly clear in the original (Articles of Confederation) version of the clause, which stated that citizens of one state traveling to or doing business in other state were "subject to the same duties, impositions, and restrictions as the inhabitants thereof."
This means, for example, that if a state wants to tax residents of other states that do business in their state, they have to tax their own residents for the same activities.
So, if CA wants to tax an Illinois business for its activities in CA, it would have to tax CA residents for those same activities. And CA absolutely does.
The Privileges and Immunities clause has only been interpreted once by the Supreme Court and only (so far) protects the right to interstate travel (on your own two feet, BTW). It has never been held to forbid interstate taxation, and in fact, the right to interstate taxation was recently expanded in South Dakota v. Wayfair, Inc. (2018) when the Court was already conservative-leaning.
The plain text of the Constitution often does not mean what laypeople think it means.
> The plain text of the Constitution often does not mean what laypeople think it means.
"We the people" does not seem to be written for Ivy League lawyers to understand and translate to laypeople. A Constitution written in a way that only a small percent of people are "trained" or "authorized" to understand or apply is a big time failure. Just sayin'
The constitution was pretty clearly, from day one, written by educated 1%'ers, FOR educated 1%'ers. It was never meant to protect or privilege the laypeople except by accident and vague notions of "everyone deserves rights, except for those that improve self governance, only white landowners deserve that"
The problem is not the way the Constitution is written. It's a bunch of people who think that their understanding of, for example, "Privileges and Immunities" is obviously correct.
> 1099 is definitely the way to go for as long as you can - people still get social security credit.
The "danger" with a 1099 isn't that you don't get social security credit, it's that there's no withholding, so the recipient has to pay all of the taxes after the fact (instead of getting a refund come tax time like most? many?).
It shouldn't be a problem for someone used to this and plan/save accordingly, but it's easy for someone new to contracting to fall into a trap of "OMG, look at all this money!! I'm going to go buy something expensive..." and spend everything, without considering their tax liability down the road.
Yeah, I assumed that was common knowledge, and is one of the reasons 1099 hourly pay is typically greater than W-2 hourly pay. (other reasons include that you don't typically get PTO, health insurance, retirement account, etc)
Doesn't that apply to all sorts of employee compensation? ISO's vs RSU's, employee stock purchase/matching programs, PTO options ("unlimited PTO" in particular can be bad for the employee), health insurance options, 401k contributions.
All can have big financial impacts to employees, and employees need to understand them before they accept an offer. There's no reason to be surprised by the tax implications of 1099 vs W-2.
1099 isn't necessarily worse than W2, it opens more tax deductions for the employee, but also requires more bookeeping and the employee needs to understand what the difference is.
I had to go through this process once. Large multi-national didn't wanna do the whole paying the state thing(thats reasonable) and I was the only employee moving to that state.
They ended up classifying me as a "contractor" working under one of their existing agency relationships but aside from who signed my paycheck there was no distinction
> 1099 is definitely the way to go for as long as you can - people still get social security credit.
Dirty secret of remote work is that lots of companies are abusing the 1099 system to make it happen. The workers definitely don't meet rules for being 1099, but tax compliance (not to mention sorting out benefits) across a whole bunch of states and even countries is crazy overhead, so the realistic options are to make everyone 1099, or to only hire from one state.
... then again, a bunch of bigcos abuse 1099 for non-remote employees all the time and have for years, so, not like this is unique to smaller all-remote or remote-friendly companies.
Registering as a business in a state though is usually an activity that takes 15 minutes and around $100. If you are doing enough to have a few employees, paying an accountant type to do this for you is very cheap and quite easy.
But that's exactly what OP is complaining about, they didn't register their business. If you have any presence in a state, including employees that are residents and working there, you should be on notice that you need to 1) tell the state that you're doing business in their state by registering your business (simply paying your employee is doing business!), 2) file a tax return from income derived in that state, and 3) adhere to the laws (including employment laws) of the state. That someone started a business and didn't know this is itself surprising because it implies that they didn't ever talk to an accountant or a lawyer but somehow had the wherewithal to hire an employee as a W2 employee.
Imagine the opposite: you set up your business out of state and employ California residents but don't follow any of their labor laws. You underpay them. You don't take out the appropriate amount of state taxes. You don't report their income to the state. You don't give them overtime pay. How is this not just a glaring problem?
An out of state LLC registration in Texas is $750, plus you have to give them a credit card up front, so they can charge you $1 per name search on a web forum to ensure that your business doesn't conflict with any existing business. Though, they will refund that money if you end up registering. Mostly, this is to say that even in "business friendly" states like TX, registration isn't necessarily cheap or friendly by comparison.
Yeah most states will be more like $100, even $800 though... if we're on hacker news and probably talking about tech workers... it is still a tiny amount of overhead cost.
California is unusually aggressive compared to other states. We had an employee with a home address in California who never set foot in California during the period he worked for us. We paid his withholding correctly to CA. Received a similar letter from the CA franchise tax board that our business also owed a CA return with a minimum $800 filing fee. They only accepted correspondence by fax, no email, no website. Since he was never in CA during his period of employment, we didn't legally owe the return, but CA said the onus was on us to somehow prove he never set foot in CA. Providing his personal credit card receipts showing daily charges for meals and such in DC (where we were located)over the entire period of employment was deemed not good enough. Ultimately we gave up and just paid the $800, it was costing more in time to argue. I've never had similar issues regarding employees in other states. If there were disputes, issues or mistakes related to tax filings, there was a reasonable process for communicating with the state tax board and resolving.
California's attitude toward tax is that if they can strongarm you for money, they will. The state really doesn't care about what's reasonable, moral, or within the bounds of the law as it's written; if they become aware of even a tenuous connection to the state, even if that's just having once lived there, they'll try to tax you.
For those who are considering leaving California: make a list of ALL ways you can cut ties with the state, make absolutely sure you check all those boxes, and document everything.
> but CA said the onus was on us to somehow prove he never set foot in CA.
Isn't that true in approximately the same sense that it's true that the onus would be on the California government to find you and work with your local government in order to extradite you?
> They only accepted correspondence by fax, no email, no website.
FWIW, I've never had a problem reaching the FTB or CDTFA by phone. They also have field offices all over the state, though I realize that would not have been useful in your case.
They required documentation (for example, the credit card statements), so a call wasn't enough, I could mail or fax. But I did call them multiple times when trying to resolve, which was also a hassle. It's absurd that fax was the only means of electronic communication acceptable. How can you not accept email or have a web application? I don't know of a single other state that requires electronic communication solely by fax. I took it as a sign that CA wanted to create artificial hurdles so we would just give up and pay, which is ultimately what we did.
If that ever happens to you again, presumably the employee has a state congressperson that represents the address where they get paid, and is a constituent. You can usually email the state congressperson and get a response and they can help you interact with the regulatory body.
So OP wanted to become an employer but had no idea what being an employer actually entailed or did any basic research into things like the fee to do business in California. Got it.
Not that Cali’s system is awesome but give me a break, OP jumps into having W2s yet complains that Congress needs to pass laws and no one should hire in CA?
I was fully aware that being an employer means filing all employer-related paperwork, withholding, unemployment insurance, and dealing with various employment-related regulations, and I did that.
I was not aware that hiring a remote employee there required that my business file an income tax return, which is completely unrelated to employment. My income is none of California's damn business if I don't sell anything there and have no other nexus with the state.
Plus, no other state has California's absurd franchise fee, even for small businesses with zero revenue.
Except it did, because all revenue generated by your business was made in substantial part by using Californian resources. A resource that, had you not hired them remotely, would have contributed to the Californian economy instead. As such, California has laws in place to recoup those losses. Of course, at some point "one Californian asset" amongst many assets from other states is a drop in the bucket, so there's a threshold, and your business was well above that threshold.
Is it questionable phrasing? Yes. Is it wrong? No. Your business clearly and directly derived income from California, and per California law, the state is owed income tax on that.
(But is it kind of ridiculous in a modern economy? ...ehhhh it depends. California is one of the few economic powerhouses amongst the states, and there's good arguments to be made for having this system in place. You can argue about the threshold, but the idea that states should not be allowed to recoup economic loss from people being hired out of state without the employer paying back taxes over the income generated through that hire to the state that got them that hire, is not quite thinking it through)
> California has laws in place to recoup those losses.
Except this was done across state lines. There's a term for that: interstate commerce. The federal government has the sole power to regulate interstate commerce. California should pound sand here.
The Interstate Commerce Clause says that the federal government has the constitutional authority to regulate interstate commerce, which likely means the federal government could prohibit California from doing this (I say "likely" because "interstate commerce" is complicated and has a long history of court cases). It doesn't say that no state can make any rules whatsoever that affect interstate commerce. Plenty of states have plenty of regulations in place for interstate commerce, including obvious things like inspections at state borders.
Typically there is a minimum number of employees required to trigger regulations such as that. For example, you are exempt from the required healthcare mandate if you are under 50 employees, I believe. This is common sense stuff to keep the burden for small fledgeling businesses minimized while extracting ethical employment from large. California obviously doesn't take this approach, so I'm glad I've been informed of it.
It's their state, so they can pass whatever laws they want obviously. People living there just be aware that this is incentivizing not hiring remote from California.
Indeed - as a rule of thumb, if you're going to do anything business related across state lines, always consult with both accountants and lawyers specialized in the state(s) you're thinking of getting involved in.
IMHO - I think this is where we are really screwing up as a society. We shouldn't need accountants and lawyers just to live our lives. We need lawyers when we are in trouble. Need accountants to keep track of our finances. But should we really need them just to live, do something new in an unknown area?
My personal opinion is that we spend too much on lawyers and accountants. Our society should be optimized to let people focus on their ideas - bring in cash flow - and lift the entire society up when possible.
That said - I'm not sure I have a good solution here. I don't think we should tax income (don't punish people for working). I go back and forth on sales taxes (I kinda like use taxes, but again, that negatively affects a significant amount of the population un-proportionately). A chunk of the world uses VAT. I'm researching VAT closer.
We can make this a more fair, easier to operate in world than we have now. I'm a supporter of that.
We don't need accountants and lawyers just to live our lives. We don't even need them if we have a well paying job, a mortgage, a fulfilling long term relationship, and a clutch of progeny.
But we do need them to run a business, because --and this is the part that explains why-- your brain is finite, and you cannot be an expert at accounting, and law, and your actual profession. The willingness to outsource expertise to other people is what makes society possible.
As for calling income tax a punishment: that's a bit weird, because you're not paying taxes on "your money", your money is what's left after taxes, the amount before taxes was your employer's money. Only some of that is going to be yours. If you live in the US, you unfortunately live with an idiotic system in which you are handed the full sum, being way more than is actually yours, and then making you responsible for splitting it up correctly and punishing you if you don't. However, if you live in a more modern country, at least in terms of how tax is handled, you wouldn't need to do this at all. The taxes will be withheld as part of the transaction, paid by the party doing the paying, and what is received is 100% the receiver's money, with no further taxes owed. (we see the same idiocy vs. sensibility with sales tax: some countries like Canada or the US have the insane habit of listing untaxed price in stores, with an inflated price at the till. More sane countries instead list the actual price of goods, with the tax processing taking place in the computers that handle the payments)
Remember: your country needs to make money for it to stay a country. Setting a rule where any monetary transaction taking place in the nation (made possible only because there is a working national economy in the first place) has to include a portion that gets used to fund the nation that makes the economy possible isn't too crazy. Sales tax, income tax, capital gains tax, etc. are basically all the same thing (money changes hands, the nation gets a portion of it so it so that it can keep operating) using different rates (mostly) adjusted to be appropriate to how much is necessary to prosper. Of course, in a good tax implementation, you don't "get that money and then you have to pay taxes", instead those taxes are withheld as part of the payment and when the tax date rolls over, you have nothing to do (something that a number of countries actually do).
It's when you get into levies (property tax, fuel surcharges, etc) that things become a bit more questionable, and one of those "what kind of country do you live in" differentiators.
Even if you treat yourself as employee, a business with two employees, with one of them from California, gives rise to a situation where it can be trivially argued that well over 25% of the business income can be attributed to a Californian workforce (even if the exact contribution isn't 50%, it is most certainly substantial enough to warrant a tax notice)
I'm not sure if you're reading the whole thread here.
> well over 25% of the business income can be attributed to a Californian workforce
The argument is that the company in question had 0 total revenue. If you want to attribute 25% of that to a California source, sure, but it's still $0.
ok, he has 0 total revenue. No problem. Prove it and then everything is fine. How do you prove it? Fill an income tax return!
His complain is that he was "required that my business file an income tax return" . Which is part of proving how much money his business made.
But of course, a blog post is not proof of income. A properly filled out tax form is.
So yes: California absolutely wants you to show that the over 25% contribution by one (or more) of its resident(s) amounted to an income of $0. They are not going to take your word for it, because your word is no good: fill out the paperwork to prove your claim. If you don't, it would be far more reasonable to assume that your business had enough income to pay for their employee (which typically costs a company twice what they actually pay in gross salary), which by definition is a non-zero amount (because under contract law there has to be an exchange of value for a contract to legally exist: you cannot be contracted to work for free).
> A resource that, had you not hired them remotely, would have contributed to the Californian economy instead. As such, California has laws in place to recoup those losses.
Why not just ban remote work from CA to elsewhere then? The CA citizen, apparently, belongs to CA in your view.
More like an opportunity cost. Talking about "lost" payroll and income tax revenue that would have otherwise gone to the state. The employee, living in the state, would have spent their income there regardless of where that income was sourced from so that's not at question here.
> California has laws in place to recoup those losses
California does not own the employee, it is no longer the time of slavery. Or it is still slavery in a different form, where states own almost everyone, especially their revenue?
Look, if you want to expand the definition of slavery to include the power to levy taxes on income, fine, but you aren't speaking the same language as most people at that point and no productive conversation can happen without a shared language.
It's clear from the context of this post and subsequent comments that the power to levy income taxes itself is not at issue. What is at issue is California's levying of taxes on non-residents without limit of jurisdiction. That's taxation without representation. It may not be fully-fledged slavery in technical terms, but OP's plight is nothing less than attempted dispossession by the Franchise Board.
I'd also like to note that the term "slavery", in a colloquial or non-rigorous sense, has been applied to serious topics both on and off HN.
e.g. wage slavery [1], overwork of graduate students, unpaid internships, medical residency practices, etc.
I'm quite sure we still have a shared language despite the lack of rigor in those cases.
[1] Applied strictly, the term is self-contradictory
State taxes make it clear that the state has a fully legal claim on some percentage of anyone's income. If you want to interpret that as slavery, go ahead, but that's not very fashionable in legal circles.
Then explain how is that not modern slavery: someone declares rights over you (your income). I don't care what legal circles fashion, the same legal circles in various countries fashioned slavery, genocide, wars etc. without blinking.
Apparently you take an extreme position on this, in which it is not possible for a society to adopt political processes that end up asserting the collective right to some part of the society's economic output and a mechanism for obtaining that based on taxation ... at least, not without that being termed "slavery".
I have no doubt that you can find some sort of analogy that explains how slavery and taxation are equivalent. Good work. I'll be moving on.
How can China know you are not selling anything there is you don't report it? Or Russia, North Korea and the other 250 countries on this planet? You know your computer is made in China and probably your clothes too, so you are doing business with China, do you report your income there?
If you're operating a business there employing people then yes of course it's their business. It's like this is the first time you're hearing about 'the government'.
Also your conclusion (“don’t hire remote workers in CA”) doesn’t necessarily follow from your specific situation. If you had 9 existing employees outside California, then hired your 10th from California, you wouldn’t have had this issue and you’d be focusing on your business instead of ranting on a blog post.
If you derive income from some states you need to file with them even if nobody from your company works there. That may be hard to enforce but that is the case for many states. I agree that it is a total pain for business owners though, it is difficult to understand the patchwork of state laws that apply or don't apply to you _and_ find the right people (accountants/lawyers) to deal with it.
Honestly, this is pretty normal, if aggravating. When I moved to TX, a registration for an out of state LLC was $750. The registration system required a credit card up front to levy a $1 charge for every name search on a web forum to ensure the business name didn't conflict with an existing entity. Though, they will refund those fees if registration occurs. After registration, I spoke with the comptroller and they told me to register for sales tax and that would be the only tax paid. A year later, I received an angry letter from the secretary of state that I owed gross receipts tax and their estimated payment was over $1000. After some investigation, I discovered that this tax was only levied on revenue of over $1 million and TX knew precisely what I had made because of the sales tax filings and they significantly under that amount. Further, it's unclear to me why there are two different departments levying taxes in TX and why the first wouldn't give a heads up about the second. Additional filings made the problem go away.
The point is not that this situation is the exact same as yours. The point is that each state has bizarre, unintuitive tax and employment law. Even if you ask, you'll likely get incorrect information from the state until an angry letter shows up. As long as your paperwork is organized, these problems can be made to go away. This is the cost of running a business. It should be easier, but it's not. Some states are easier to work with than others. Even "business friendly" states like TX are aggravating and much more so than other states that I've done business in.
> My income is none of California's damn business if I don't sell anything there and have no other nexus with the state.
Is that what the law actually says, as stated by someone with some expertise about your situation (including the cross-jurisdiction aspects)? Because you don't really get to be your own judge an jury.
I perceive civil business law to be a big pile of known and unknown unknowns (to me), and I certainly wouldn't trust my interpretations of it for anything important.
I mean you seem to have this idea that your business is “you” but your business is “you and your employees”.
50% of your business (and to be frank probably 80%+ of the value add based on your write up) was done in California but you act like it’s crazy for California to make the above claim.
> I was not aware that hiring a remote employee there required that my business file an income tax return, which is completely unrelated to employment. My income is none of California's damn business if I don't sell anything there and have no other nexus with the state.
Your business is generating revenue from a resource of California (their resident). You better believe they’re going to want a piece of that.
Also OP posted a rant but doesn't seem to know what is going on or whether he actually needs to do anything. For all I know the demand from the CA FTB is mistaken and can safely be ignored.
For the record, I do have to deal with the FTB because I have a California LLC, and they are a major pain and cause of expense in that situation.
When people complain about monopolies, remember applying the same set of onerous regulations on a company like Amazon and this guy with a one employee startup favors the large companies by orders of magnitude more.
When only the rich and powerful can start companies, it is not a fair world.
Kinda shocked a native-born American who attended 2 elite schools here didn't fully grok the implications of our federalist system. You gotta take the good with the bad my friend!
The more complex the laws, the fewer people will be willing to learn "what being an employer actually entail[s]", and will instead operate illegally, or not start a business.
As an ex-New York resident, I can safely say that I will never be living in a state with an aggressive revenue department again. California is the only state worse than New York. The cost of dealing with their revenue department has been far greater than the amounts on the bogus demands that they send, and somehow you have to spend the money dealing with them even if you plan to pay up. They also want you to prove to them that you don't owe more by going through an exhaustive process that is full of footgun questions.
Yes, this guy is complaining because he didn't read the laws or get legal/financial advice before hiring someone in CA. However, that doesn't excuse the CA tax authority from being annoying and aggressive. If you are a high earner in one of these states with more than $0 of unusual income (and rentals count as "unusual") or if you do business in them, you probably need a good accountant or a tax lawyer if you want to make sure that you are safe. It's just a cost of doing business there.
Is this really unique to California? He had 100% of his employees in California. (100% of 1, but still.) I'm having a hard time imagining that no other state in America would consider that "doing business in the state."
It’s not that absurd. CA regulatory infrastructure is setup for established, large firms. It’s obvious that small businesses don’t have the overhead to deal with EDD and FTB. As an example, I spent 10x more time dealing with the state for my nanny than I did having to manage her.
The state needs small business rules with simple forms, push button compliance and exemptions for interstate commerce.
The alternative is that most small firms live in the informal sector or do things wrong, not b/c they are bad actors but b/c compliance is hard.
There are companies that businesses can hire such as Gusto, JustWorks, etc. that handle all this red tape for you. Most well-advised startups do just that.
For the same reasons they don't generate their own electricity or grow their own food: Because dealing with red tape isn't core to most businesses' missions.
Why should tax regulations be so complicated in the first place? This is the same mentality that let the IRS grow into the beast that it is today. Most of this stuff should be 100% automated unless you have some edge test case.
The IRS doesn’t write the tax (revenue) code; Congress does. And the tax code is the result of countless lobbyists peddling influence on behalf of their constituents, all of whom are looking for a carve-out of some sort.
People like to use the IRS as a political punching bag and it makes zero sense to me. Their job is to explain the code Congress wrote in terms laypeople can understand, design the forms, collect and process the returns, send notices, and take enforcement actions when cheaters try to flout the law. People who don’t like getting taxed or are frustrated at the complexity of the revenue code should take it up with Congress, not the IRS.
As a side note, it’s also incredibly weird that some very vocal people have a problem with the IRS, yet are staunch defenders of police, even though the IRS has never beaten up or killed a single person for breaking the law.
Anti-California sentiment in the context of small businesses generally, the FTB generally, and particularly in the intersection of these two, is eminently reasonable. The system is garbage, it’s designed to extract as much revenue as possible from large orgs and it absolutely fucks independents.
My reality is that nobody smart and wealthy that bothers to read or hire a CPA and lawyer actually is encumbered by California's "high taxes and onerous compliance".
So yeah, sure an obvious counter example is of W-2 employees at a FAANG are smart and wealthy, but many of them don't bother to look and have few ways of lowering their taxes, but people playing around with capital have plenty of ways.
This leaves a poorer class of people (in California and all across the country) that make too little to actually be encumbered by California taxes and also are not doing anything to trigger compliance measures on themselves while merely imagining its high taxes, and a richer class of people that can route around it like always and enjoy everything attractive about California.
they have to be smart && wealthy && bother to do things to nullify taxes, my second point made an example of smart && wealthy && !bothering to do thing to nullify taxes
CA FTB is hard to dodge even for capital gains. Basically, if you have ever lived in California for anything other than a "temporary or transitory purpose", you are at least a part-time resident, likely a resident. Ergo, you owe CA's silly taxes, including on Capital Gains, and CA's own version of AMT (and no, CA does not recognize many taxation agreements that are federally recognized!).
Basically, if the FTB decides to throw the book at you, you are toast.
Right. Anything that gets your AGI (adjusted gross income) low that year nullifies whatever California is looking for too.
So expense everything because you're building something revenue producing and spending towards that, trade 1256 contracts more often instead of just random stocks/ETFs willynilly (ie. $SPX options instead of $SPY options, because you actually know what you're trading), tax loss harvest aggressively, borrow against assets to begin with, spend the borrowed or outside capital on the expensable things (you owe whoever you borrowed from - eventually - but not the government, and in some cases can deduct the interest as well). Spend more than you earned that year and you have no tax to pay, achievable via having savings or outside capital to spend. Boost up assets in tax deferred and tax exempt accounts, the usual. Its easy to stagger the tax events across years, such that there is always a counteracting force mitigating taxes during that current year.
The government makes an incentive to transact in certain ways, the velocity of transactions is more important for the economy than taxes, when you fail to do that the government takes a cut of the remainder. (This is true of income and some other taxes, while other forms of taxes support very specific programs directly, and are much smaller)
I'm from the mountain west, and I'd say anti-California sentiment has been around my whole life (born right after the Wall fell). Even from my Appalachian migrant parents.
In the national media, it has clearly accelerated in the last few years.
For most East Coast rural areas, NY & DC have been the traditional bogeymen, not california. The mountain west is much more within Cali's sphere of influence so-to-speak.
The main issue with California is that they try to collect on everyone, and they require a ton of paperwork even if you did make an honest mistake. People who move out of California are often hounded by the tax board. Even something as innocuous as having a storage unit in the state can cause the FTB to still consider you a resident.
I haven’t lived in California for two years, yet I still have to pay them taxes on RSUs that are vesting this month. It’s insane.
I think better would be to have an exception for very small companies. Ie. If your revenue, assets, profits and expenses are all under $100k in the year, then you're allowed to just pay nothing and submit a 1 page form attesting to that fact.
Unfortunately, this will never happen because they love going after the small businesses! Their total liability typically is less than the cost of a tax attorney so they get paid at way higher rates than normal.
I started to generall disagree with this post, having had similar experiences with many other states harassing me to make sure I didn't need a return there because of some information that tripped up their systems. I know from experience at least two other states would have bothered him (CT and NY). The California franchise fee is high, but it's really not high compared to the cost of a single W2 employee.
However I can strongly agree that their needs to be tax simplification and the current state of affairs is a mess. For businesses under a certain revenue it should be file-able by one person in their spare time and anything else is a waste of even the state's reasources to go through. This absolutely should have either federal or California regulation to correct.
I very much agree with that statement. It's been a decade ago since I read the article about this - and I'll try to fine and post it after I post what I read.
It costs federal taxpayers around $500 billion dollars a year to file their taxes.
Why can't that be more efficient? That is a hell of alot of money that could be handed back to the taxpayers - or added to the federal budget.
Just to live, people are paying part of that. Just to be incorporated, corps are paying that. Just to file paperwork - and have someone cover it for you.
What if we could use that money to start focusing on solving cancer? Mental health issues. Instead - we pay that money and all we get is some paper that goes through a 1960's mainframe eventually (which nobody understands the IRS mainframes anymore), and risk having them just stress us out more. That doesn't help anyone.
It's a mess to get into. It's a mess if your successful. I'm not so sure this isn't a mechanism to suppress parts of our population (or all of it).
This should probably be expanded to something more like, "don't hire remote employees living in a jurisdiction whose employment laws you don't know."
Because it's not just California that can surprise you with things like this. Colorado could zing you if you hire someone who works there but didn't list the compensation range on the job listing. Quebec can zing you if you hire a Quebec resident and aren't prepared to allow them to work in French, even if they don't speak French themself.
This should probably be expanded to something more like, "don't hire remote employees living in a jurisdiction whose employment laws you don't know."
The fact states can reach outside their own jurisdiction is pretty insane in my opinion. If I'm sending money to someone who lives in State A, compliance with the regulations of State A should be the responsibility of the person who lives there, not the person who doesn't. This regulatory burden means I would never employ anyone except as a 1099 until my business was large enough hire a full time payroll accountant.
I owe $800 for the “minimum franchise tax”. California charges this fee to everyone for the “privilege” of “doing business” in California, whether they have revenue or not.
How is this not extraordinarily counterproductive? Residents of California have a child, then spend tremendous resources both private and public raising and educating that child. When the child becomes an adult he find an employment opportunity with a company in another state. California behaves as if it would rather him just leave and take all those resources than stay and pay income tax on his earnings that come from out of state.
Except it is their jurisdiction. If you have an employee in a state, you need to comply with all the regulations in regards to employees.
For example, if you’re based in Tennessee and you if hire an employee in Washington and decide you only need to follow Tennessee minimum wage policy, Washington has every right to fine you or take you to court under Washington law.
In what way are laws for employing someone in a state indefensible?
You don’t get to set up shop in a state with low taxes and minimum wage then pay your employees in another state using whichever state’s laws you prefer.
Except in this case the 'shop' is in Illinois. A California resident commutes his bits to Illinois and somehow in all it's wisdom California wants to exercise itself outside of its jurisdiction into the shop in Illinois.
No, in this case the shop is in California, where the California resident is performing his work, which is then transmitted to the office in Illinois.
CA gets to regulate the company with respect to its CA operations, i.e., that employee in CA. The CA regulations don't apply to any of the company's non-CA employees.
This has always been the rule with respect to employees working in other jurisdictions.
I recall that Kansas and Missouri had a tax arrangement as lots of people lived on one side and worked on the other (there are two Kansas City’s). This meant that only the excess was paid to whichever had the higher tax rates although both forms were filed.
I find it comical to see you assert, in 3 words, that states shouldn't have the ability to exercise their regulatory powers to protect their citizens on the singular basis that the entity subject to regulations is outside their border.
The real "untenable" thing is proposing that corporations can neuter state laws entirely by the simple act of incorporating in not that state. I'm sure that wouldn't lead to a race to the bottom or anything, the US definitely doesn't already have issues with corporate-owned states or anything
I have no problem with California exercising its sovereignty over its own citizens. The employee in question should have been protected by California laws, being a resident of California.
What the article's author relates is California asserting sovereignty over an entity that has no nexus or revenue derived from California. This is the overreach and should be outright banned at the Federal level, otherwise there's nothing stopping a state from passing a law that requires companies to pay $30,000 tax for the next five years for every employee that vacations in that state. Do we really want to stomp small businesses with having to know the business tax codes for all fifty states in this age of remote work? I think not.
It's about as stupid as the five states in the US that decide they can impose income tax on non-citizens of those states if the employer resides in that state.
They have nexus in California the moment they engage in business with an entity in California. When they hired an employee in California the employee was the entity and hiring them to do work while in California was engaging in business in California.
The idea that the employees and the work they do aren’t part of the business is some new idea that I hope doesn’t gain traction.
Say the federal government did allow for this line of reasoning and prevented states from treating remote employees as having nexus in the state they live and work in. How does that not end up with every company incorporating in one state and hiring all their employees in other states so they can avoid all state level regulation?
> an entity that has no nexus or revenue derived from California
The revenue any business derives is the sum of its employee efforts. A physical presence vis a vis an employee is surely a nexus.
> otherwise there's nothing stopping a state from passing a law that requires companies to pay $30,000 tax for the next five years for every employee that vacations in that state
You know, I'm not surprised you would make such a hilarious non-sequitur given your position makes no sense in the first place, but to argue "an employee going on vacation in a state" is even in the same universe as "employing a resident of a state" is actually pathetic.
> Do we really want to stomp small businesses with having to know the business tax codes for all fifty states in this age of remote work? I think not.
Do we really want to simply take away all regulations so corporations can take advantage of interconnectivity and globalization to be even more exploitative of workers and increase wealth inequality further? I think not.
> It's about as stupid as the five states in the US that decide they can impose income tax on non-citizens of those states if the employer resides in that state.
What is a "non-citizen of a state"? I have never heard of citizenship in a state, that is a country-level concept. If you perhaps mean non-residents, I would also agree this seems like overreach, except funny enough the US government does the same thing to all its citizens unless they pay a big fee to renounce their citizenship, so it is a distinctly American brand of overreach!
What if those citizens move to a different state or country? I think we can agree the new state's laws shoud apply exclusively. Why or how is that different from commuting into work across borders? And why is that different from working remotely?
Maybe there is a reasonable explanation for treating these differently, I just don't see it right now.
> What if those citizens move to a different state or country? I think we can agree the new state's laws shoud apply exclusively.
Yes, because if the person moves to a new state, their entity has established a nexus in one state, and therefore that state exclusively governs them.
The business entity who has employees in other states is, by the exact same logic, subjected to the laws of each state they have nexus in, and an employee that is a resident of a state is transparently a nexus in that state, as you agreed upon in your "moving" example.
What is untenable exactly? That a state is provided the ability to enforce their laws?
National governments are allowed to enforce laws outside their own borders, such as intellectual property and copyright. While challenging to enforce, it is possible.
The states also signed laws, akin to treaties at the time, agreeing to allow other states to enforce certain domains of law within their jurisdiction. This is part of how the federation of the United States of America came into being.
Are these general or specific? I know some laws have been passed like a treaty between states, especially ones that border each other. The ones I know are very specific.
Not really, or not always. An example: The IRS taxes every US citizen on all income, regardless of where they live. They didn't go setup tax treaties with every country. If I'm a US citizen living in North Korea, I still have to file US taxes every year, despite the 2 countries essentially hating on each other for decades.
Sure, but that's devoid of the international enforcement mentioned. If your assets are in North Korea or a Swiss bank, then they can't force you to pay it. If your assets are in US accounts, then they could easily do so. I imagine there are other countries that we do have treaties with (or even if the bank has branches/business in the US so that the government doesn't make their life difficult) that would cooperate in freezing your international assets held in those countries too.
I agree, enforcement matters. My opinion: In the last 50+ years, it's been a very bad bet to be against the USA. They generally get whatever they want.
The way things are going these days, I would never move to a place that doesn’t have a current agreement with the United States and assume it’d stay that way.
It should be on the employee to pay the relevant tax on the income they receive, anything past that is outside the state's jurisdiction, as the company has no physical presence or business there. A government doesn't have the power to enforce its laws beyond its borders, without specific agreements in place. Does every state have the relevant agreement with the state of California to allow it to enforce its laws on their territory? Can the state of California even sue someone that never entered their jurisdiction?
You do have presence and business there. You're employing residents of that state. According to the law, that employment arrangement takes place within that state's borders.
If a company from Virginia does business with an employee from California, then business is taking place between entities of Virginia and California, thus Virginian and Californian laws must be followed. It is that simple.
Lack of physical presence should exempt you from prosecution from a states laws.
They are of course free to capture anything that crosses their border, which in this case ought to mean that your company won’t be able to send money to the state.
Current US employment and business laws are not set up well for remote work at all. Several states say different things about this, and there is probably going to be a reckoning on this subject soon.
I don’t think I should be physically present in the USA just because I transferred money to a USA citizen in exchange for services.
However USA law defines this, I think is wrong. That’s what I’m saying.
The USA is an outlier in many ways. It taxes it’s citizens outside of the country, forces awkward bilateral trade agreements , and is not at all harmonized with work laws of other countries.
An office is a physical presence to me. A single person working from their own house is not.
In my comment, I was referring to the state as the entirety of the US , including California.
But I suppose if your company already is in the USA, you should have to deal with the tar pit if it’s multiple jurisdictions. I hear people who WFH for NYC companies have to pay city tax even if they are in some other US state, so this is really no difference.
The employee is deriving value across the border. The shop itself is in Illinois, where they derive value from bits and bytes within their state. Charge the employee with any tax crimes, not the company.
The value is provided in Illinois, not California. The work is worth nothing to the shop in Illinois while it is in California. The employee shipped the bits to Illinois, blame them for shipping the bits to Illinois. Compensation was provided for the bits in Illinois, not the bits in California. Why would the Illinois company pay for bits locked inside California that they can't access.
The value to the consumer was provided by the company in Illinois, the value to the company was provided by an employee residing in California.
Why would the intellectual property the employee generated be worth nothing simply by originating in California?
In other words, if a bottle manufacturer in Illinois sourced raw glass pellets from a plant they owned in California, they would be deriving value from a source in California. The glass is not worthless because it hasn’t been converted into bottles yet.
The employee is providing intellectual property across state lines, which is why the state can enforce laws on that value that originated from within their jurisdiction.
>The value to the consumer was provided by the company in Illinois, the value to the company was provided by an employee residing in California.
The value to the company was provided in Illinois, with bits inside of Illinois. The company doesn't value bits inside California that it cannot access. They compensated for bits they can actually access within Illinois.
>Why would the intellectual property the employee generated be worth nothing simply by originating in California?
It may be worth something to someone in California before it's exported, but that transaction never happened. In this case though the actual transaction took place in exchange for a product inside Illinois.
>In other words, if a bottle manufacturer in Illinois sourced raw glass pellets from a plant they owned in California, they would be deriving value from a source in California. The glass is not worthless because it hasn’t been converted into bottles yet.
This is actually a great example. I buy ammunition online from a company in Oklahoma, where all the business and employees of the ammunition company resides. Yet I pay sales tax here in <my state> based on recent court rulings regarding 'internet sales tax' which state the tax is where the transaction took place (/the finished product goes to), not where the company and/or workers physically resides. It wouldn't make sense at all for me to pay sales tax to Oklahoma, even though the ammunition and even all the physical presence was initially generated there. I pay sales tax where the transaction and actual value to me, the buyer of the goods, actually are. Using the same analogy from this court ruling, you would pay tax on the IP you bought in Illinois and not where it was initially produced California.
>The employee is providing intellectual property across state lines, which is why the state can enforce laws on that value that originated from within their jurisdiction.
The employer is buying IP within their state lines of Illinois. You may be arguing the 'employee' is actually misclassified and is an illegal exporter who is a business owner in California with an export and bit smuggling business. Go after this 'employee' (bit smuggler), not the person buying bits in Illinois.
> The value to the company was provided in Illinois, with bits inside of Illinois. The company doesn't value bits inside California that it cannot access. They compensated for bits they can actually access within Illinois.
Your comment confirmed that the value originated in one place, California where the company could not access it, and was transferred to another place, Illinois where the company could access it. The employee was compensated for the transfer of this value. That is interstate commerce, and therefore the jurisdiction of the originating state, California, can apply.
> It may be worth something to someone in California before it's exported, but that transaction never happened. In this case though the actual transaction took place in exchange for a product inside Illinois.
The company in Illinois compensated the employee for their time to generate intellectual property, so the company valued their work and exchanged payment to the employee for exchange of that value. So then the work clearly has value prior to being packaged and sold to the end customer.
> I buy ammunition online from a company in Oklahoma, where all the business and employees of the ammunition company resides. Yet I pay sales tax here in <my state> based on recent court rulings regarding 'internet sales tax' which state the tax is where the transaction took place, not where the company and/or workers physically resides.
The exchange of value and compensation between a company and their employees is governed by employment law. You seem to have conflated the concept of an employee with that of a business or an independent contractor, which are not the same thing, and are not governed by the same laws. When you hire employees across state lines, you are extending your business operations across state lines, and are subject to state jurisdiction. That is the cost-benefit trade-off of hiring outside your state, if you hired employees outside your country, for example in Canada or Mexico, then you would be beholden to inter-national laws governed by treaties.
> The employer is buying IP within their state lines of Illinois.
No, the business is not "purchasing IP within their state lines", the business is employing a person who resides within another state, and therefore the business must abide by the employment laws of the employee's state, as well as the business state of origin. An example of buying IP would be purchasing a legal contract template, or a software license. In the examples I provided sales tax for the state where the purchase originated would apply.
> You may be arguing the 'employee' is actually misclassified and is an illegal exporter who is a business owner in California with an export and bit smuggling business. Go after this 'employee' (bit smuggler), not the person buying bits in Illinois.
I'm unsure if you are trolling or just very confused, but your statement makes no sense and does not fit within the logical framework of United States inter-state commerce law. Employees are not classified as an independent business, they are and extension of a business's operations.
>That is interstate commerce, and therefore the jurisdiction of the originating state, California, can apply.
States are divested of the power to regulate interstate commerce. This is squarely jurisdiction of federal government, not the states.
>Your comment confirmed that the value originated in one place
The bits originated in California. The value originated in Illinois. It was valueless to the company while locked in California. Perhaps it was valuable to someone else who never made the transaction in California, but not to the company in Illinois who actually paid for it.
>The company in Illinois compensated the employee for their time to generate intellectual property,
If the employer were simply paying for time then why not hire a prisoner or a nice retired old lady to sit in a chair for 8 hours a day? We both know they aren't paying for time, they're paying for the useful bits they have in Illinois. They want the IP, not to burn people's time.
>So then the work clearly has value prior to being packaged and sold to the end customer.
It has value to the customer in Illinois, not in California. It is valueless to the customer locked up in California. It has value perhaps to the employee in California, but not the employer (customer).
>You seem to have conflated the concept of an employee with that of a business or an independent contractor, which are not the same thing, and are not governed by the same laws
I haven't conflated, I'm showing the courts contradict themselves. They say it's fair game to charge sales tax even with no physical presence, with no tax paid to the other state with physical presence, but then want the exact opposite if you buy IP from an 'employee' instead of bullets from a company. It makes no sense. They want to have their cake and eat it too. One may argue such wishy-washy behavior is 'arbitrary and capricious' which could cast doubt on whether their rulings are even enforceable.
>No, the business is not "purchasing IP within their state lines", the business is employing a person who resides within another state, and therefore the business must abide by the employment laws of the employee's state, as well as the business state of origin. An example of buying IP would be purchasing a legal contract template, or a software license. In the examples I provided sales tax for the state where the purchase originated would apply.
We simply disagree here. I see that they are purchasing IP within their state lines, you see something completely different.
>I'm unsure if you are trolling or just very confused
I could say the same for the state of California. It seems they are trolling to go after someone in Illinois for buying bits in Illinois.
Once it was in Illinois it had value, before that it didn't have value to the buyer. Again it was useless to the Illinois company while locked up in California.
California wants to regulate interstate commerce, which of course is flatly unconstitutional. California's tax board is a clown circus of petty tyrants who have tortured and subjugated their victims for far too long.
> States are divested of the power to regulate interstate commerce. This is squarely jurisdiction of federal government, not the states.
It's not as simple as that. States can indeed apply their laws to interstate commerce in a myriad of ways, but not to the degree that the U.S. federal government can. States for example can force e-commerce companies to apply sales tax to purchases made by customers based in the given state, even though the business is based in another state. By your logic, the state should only be able to enforce their laws on the resident customer, but that's not true, they can apply their law to the online retailer who doesn't have a presence in the state and force them to collect the taxes on the state's behalf and remit the taxes to the state. [0]
As a second example, a state's minimum wage laws apply to any person who resides within the state, even if that person works remotely for a company based solely in another state. If you have a company in Illinois, your minimum wage is $12.00 per hour. If you employ a person who resides in California for remote work, you still must pay them the California minimum wage of $14.00 per hour. You must also adhere to other labor laws for the employee who resides in California for overtime, maximum hours worked per day, and others. [1]
> We simply disagree here. I see that they are purchasing IP within their state lines, you see something completely different.
We do disagree, but your opinion also disagrees with one-hundred years of U.S. employment case law, and so I would argue is factually incorrect.
>By your logic, the state should only be able to enforce their laws on the resident customer, but that's not true, they can apply their law to the online retailer who doesn't have a presence in the state and force them to collect the taxes on the state's behalf and remit the taxes to the state. [0]
Which of course is insane and shows the dire state of constitutional crisis in our nation.
>minimum wage laws
Another horrible kick in the teeth to the poor -- outlawing work for the lowest on the rung of the economic latter. Minimum wage laws are an argument against this legislative tyranny, not for it.
>We do disagree, but your opinion also disagrees with one-hundred years of U.S. employment case law, and so I would argue is factually incorrect.
I count that as a pro, not a con. The last 100 years of legislation in the US is the biggest swath of which ought to be eliminated, IMO. Starting with the 16th amendment.
Under literally more than a century of law, domestic and international, the company is deriving value from the employee's work based on where the employee is physically sited.
So basically, you're just arguing against more than a century of essentially universal law.
Free mobility of labor is being hindered by these outdated laws. Either the state should harmonize taxation and figure this out between themselves or companies who do WFH to people living in other states should be considered as hiring independent contractors always.
That the federal government can’t or won’t step in and help people in the USA out of this morass is shameful. That’s my value judgment.
> The fact states can reach outside their own jurisdiction is pretty insane in my opinion
If they can reach there, legally, it is, by definition, their jurisdiction, whether or not it is their territory, but, in any case, this is about regulation of work within the clearcut territorial boundaries of the state, so there isn't any reaching outside going on. There is a foreign business reaching inside and getting upset that when doing so what they do in that context becomes subject to the laws of the jurisdiction they voluntarily reach into in order to exploit business opportunities available there.
Taxes too. I have a relative who works as an auditor for the California Department of Revenue. Her job is to go into business in other states and determine if they are paying sufficient CA sales tax on their business.
> I have a relative who works as an auditor for the California Department of Revenue
No such department exists in California state government. Major state-level tax bodies in California are the Board of Equalization, the Franchise Tax Board, and the Department of Tax and Fee Administration. Sales and Use Tax is handled by the last.
What's insane is that some people believe that just because they do something in a state with computers, they are somehow not bound by the state's laws.
It's not insane. It's perhaps not perfect, but definitely not insane. Considering:
* We have 50 states
* ... and if you're doing business online, add 50 countries to that...
* ... with their own sub-regions which may have their own laws (see the comment about Quebec above)
* Each of these local jurisdictions tends to have a LOT of laws on the books;
* Many of which are poorly written and unclear
* Many of which have been inconsistently, infrequently or unclearly applied as the internet has grown (you can very easily find examples of even giant companies, with corporate legal teams, running into unexpected issues)
Finally, there's the kicker:
* Even lawyers will end up telling you that, due to lack of clarity around laws applying to the internet and their enforcement, you might engage in a practice now only to find out later that it was more risky than you thought
Granted, OP's case is not the most complicated out there. It has a fairly clear answer: California is extremely aggressive about taxation and will grab any money it can. Hence the nickname "Taxifornia". And, be aware that employment is a particularly risky area.
But interstate commerce is really not as simple an issue as you're making it out to be. I've asked my accountant about issues where the answer was "well, you could technically be fined $50,000 and nobody really knows whether the state could successfully apply the fine, but right now they're not doing it sooooo..."
So? If you are doing business in 50 states, you need to be complaint with the laws of all of them. If you don't like it, you should move to a country with a more homogenized regulatory environment. Just because you are doing things with computers doesn't change anything. If I operated a franchise with 50 different locations, I'd also need to be complaint with 50 different regulatory environments.
You can't have 'states rights' (which, for better or worse, is how America claims to govern itself) and also have a single law of the land.
If you aren't sure that you're breaking a state law, don't do business in that state. Or do, and live with the consequences.
The point is that it's not insane to not have omniscient awareness of all laws in 50 states. It's tough running a very small business. If someone doesn't have enough funding to hire a team of lawyers, should they just fuck off and never do business anywhere? Your answer seems to be "yes".
You also completely ignored my point on the legal uncertainty factors. Businesses break laws every day that are just not enforced. Even a lawyer or accountant is occasionally blindsided by a state or federal authority choosing to selectively apply a law.
My sympathies lie with the small business owner here. It's very difficult to make sure that you've got every angle covered at all times, especially at the scale he's running at.
"Small business that wants to behave like large business"
You mean, exist in the 21st century and sell or conduct any kind of business online? Is that a big business?
It's a well recognized fact that legal and accounting complexity, aka red tape, is an inhibitor of small business growth. Derisively sneering at anyone who doesn't want to do the "necessary work" or "behave" is a troll opinion, and not particularly rational.
No, I mean doing business in 50 different states, or, as mentioned higher up in this thread, >50 different countries.
Any business that has ever tried to do something at that scale at any point in human history needed to deal with compliance in all of them. Just because Stripe or the Apple Store provides payment processing as a service doesn't mean that you can just shrug your shoulders, and claim that none of the other regional distinctions and local laws apply to you.
> Derisively sneering at anyone who doesn't want to do the "necessary work" or "behave" is a troll opinion, and not particularly rational.
Claiming that the law doesn't apply to you because you're a small business and you can't be bothered to follow it what isn't particularly rational, here. If you think this is an excessive burden, you should work to invest more power in the federal government, or in international unions like the EU.
You don't just get to do a run-around of sovereignty because you're a foreigner and it's a lot of work.
While I believe that the point about doing business in other countries is valid, we aren't talking about foreigners in this thread. We're talking about someone in state A that wants to do business in state B under the general assumption that they won't be blindsided by policies being vastly different between the two. I sympathize because I have been blindsided in that way before -- 3 years after making a decision, my accountant informed me that an obscure (federal, in this case) tax requirement existed that I didn't know about, hadn't known to ask about, had never heard about from a lawyer, the accountant or anyone else, and had absolutely massive fines associated with it.
Basically everything you've written is dripping with contempt for anyone who gets similarly blindsided, and you're making every effort to strawman and twist the message. Nobody, not me and not the guy writing this article, says that the law "doesn't apply" to us. Most people starting a business have a deep desire to follow the law as well as possible, because they don't want to run into future difficulties. But again, it's difficult to check all the boxes.
I wonder why you're so contemptuous, but it's kind of a moot point. Most people understand that the tax code complex, and understand that it would be better for small businesses if they were not so complex.
> You can't have 'states rights' (which, for better or worse, is how America claims to govern itself)
No, it's not.
“States rights” didn't really enter the political lexicon until it was injected there by the proponents of permanent institutionalization and expansion of slavery, who eventually revolted over it, lost, and whose ideological successors keep raising as a motto for their (usually unsuccessful, beyond the short term) attempts to resist progress on equal civil rights.
It is not “how America claims to govern itself”, it's how reactionary dissidents against the way America governs itself complain that they would prefer America to govern itself.
In the way America claims to govern itself, people have rights and governments, including those of states, have powers.
You probably mean “federalism” or “dual sovereignty” or something like that.
State's rights have been an issue since before the signing of the constitution, as can be seen by how long it took to get all the states on board. Many were reluctant to cede that much power. It was only in the early 19th century that the preeminence of the federal government was established, culminating in a ruling that states did not have the right to ignore the fugitive slave act right before the civil war. It's true that the slave states really embraced that position a their core justification, but that's not how it originated.
The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people
Doesn't say anything about state's rights. But it does suggest that any powers not already reserved by the Federal government belong as much to the people (i.e., citizens) as they do to the states.
> State's rights are literally enshrined in the Constitution.
Find the word “right” or “rights” in the 10th Amendment.
“Rights” are nowhere associated with governments (state or federal) except in being protected against them in the Constitution (either base, bill of rights, or later Amendments); in the Constitutional model, people have both rights and powers, the latter of which they endow selectively to various governments.
“States rights” is a slogan created much later than the BoR by the pro-slavery faction that continues to be an anti-civil-rights slogan.
Because the business engagement not meaningfully in that state, if the only interaction is with a an employee with a computer screen in the state.
I get, from a legal perspective, that that's not fully aligned with all court precedent, but it's OK to call it dumb that CA has any say over this situation.
Don’t forget that city and or county taxes can get involved as well as state and federal. Hence contractors. When I talked to euro companies as a n American it was never hire w/o moving to eu. Could contract but then it was all my problem.
Nobody is questioning that the employee should pay income tax. The question is whether the 1-person remote "business" has a nexus in CA and should be the treated the same as a company with a warehouse and 500 employees.
I'm not sure what you're missing here. I'm calling it dumb and inefficient. Yes, CA seems to have the legal right to set up a dumb system. That doesn't mean it's a Good Thing.
> The question is whether the 1-person remote "business" has a nexus in CA
It does; that nexus consisting of 100% of its labor force working in the state.
> and should be the treated the same as a company with a warehouse and 500 employees
That's not the question, since a company with a warehouse and 500 employees in California is not treated the same, as it is subject to a whole lot of rules and mandates that a single-employee remote-only foreign-HQ’d business is not.
One way to look at it is that taxes and fees like this are the cost of living in such a place.
California is a very desirable place to live and to employ people, so they can charge through the nose, both in terms of taxes and bureaucracy, but also in terms of housing prices.
Low-tax sunbelt states are less desirable, ergo they have to compete on price, be it taxes, housing costs, or regulations. If Texas or Florida provided amenities that people wanted and a workforce as desirable as California, either there would be a massive influx to those states, 5, 10 million people a year, or they could charge people a lot of the pleasure of living or employing there.
I think this law is meant to prevent cases where some company hires sizable amounts of employees in California (25% of payroll as the blogpost states) and then shafts the state with some "loopholes". Think of a company with hundreds of employees in California, but which is technically a Delaware corporation.
I get that a state would want to prevent scenarios like that, and I think it's somewhat reasonable. I'd argue that a company with a sizable amount of employees in a state indeed can be said to have a business presence there. What's unreasonable is the lack of "minimums". California apparently tried to be reasonable by having the 25% rule, but failed miserably (maybe by design) by not considering very small companies, like the company from the article.
The franchise tax - in that amount and considering the lack of revenue - seems unreasonable too.
I don't know what paperwork is involved, but the 42 pages mentioned for a zero-revenue company with 1 employee sounds not just unreasonable but outright Kafkaesque.
A part of the blame goes to the author for not knowing the laws involved before hiring, but the major chunk of the blame, at least in my opinion, indeed goes to the state for creating absurd laws in the first place.
That's pretty accurate for most of what the California state government does. For example, crushing the young and disadvantaged between a lack of housing availability due to rent control and a lack of new housing construction due to restrictive regulations and zoning.
Just wait until you realize what states can do with filial responsibility. Your parent could be living in PA and run up a care bill at a nursing or living facility. Then even if you live in another state, they can stick you with the bill. You're not under their jurisdiction, nor do you have the power to force your parent to move to another state. You have no choices, no power.
Ooof, I knew about filial responsibility laws and the nursing homes abusing them but that sounds downright unconstitutional to enforce them on citizens without some kind of personal voluntary nexus to that state.
Judicial complaints, discipline, and files are so secret that you can't get access to them even if there's exculpatory evidence in them. They were not made that secret by the legislature in most cases, but rather by the judiciary themselves (conflict of interest much?). The arguments used to support such secrecy don't even stand up to mild scrutiny. The main reason they cite is that disclosing complaints and discipline would undermine trust in the system. However, that would only be true if inappropriate action were being taken on those complaints.
How about police holding a charge against you they know is incorrect and carries pretrial restrictions? I feel this violates state and federal protections such as the 8th Ammendment's restriction on unusual punishment (because you can't just publish someone you know is innocent of the charged crime) and violations of the rules of criminal procedure. I've seen this happen, and the state police say that it's within their rights to hold a charge that is incorrect and imposes pretrial restrictions. A civil rights attorney I contacted said it was a violation of our rights, but the courts don't care if your rights are violated unless there was substantial financial damage. I also reported it to the DOJ since they have a division that will sue states to change policies, patterns, or practices that violate constitutional rights. I'm sure my submission went right in the shredder. They have so many important things to look at that they don't even care about this.
I had a prosecutor that had the information that it was an incorrect charge and our rights were violated. They also acted outside of the rules of criminal procedure to make sure the court wouldn't talk to us, blocking our ability to secure remote accommodation for our witness (a violation of the Bar's professional standards and an overreach of their authority given the rules of procedures did not allow for this). Guess what. The Bar will not even investigate misconduct claims against prosecutors unless the court declares misconduct occurred. So what are you investigating if you'll only look into after someone else made the determination? Worthless.
I had a recording of a magistrate yelling at the defense, showing bias against the defense (magistrate was a retired police chief and showed blatant favoritism for the trooper), and they violated the state constitution that guarantees defendants the right to be heard when he denied the request to hear a valid petition to dismiss, responding simply with "That's not gonna happen". I submitted a complaint for his behavior. I mean, the yelling was actually an example of misconduct given on the disciplinary board's site. You would think that a textbook example would be investigated. The only response I got was that there was not enough evidence to confirm any misconduct, which would include the uncurteous conducted listed in their site (yelling). How much evidence do you need beyond a recording and witnesses?
I could go on. The point is, nobody gives a shit about your rights (or mine) - not law enforcement, not the judiciary, none of the agencies/boards that supposedly oversee them.
If nobody enforces your rights, them do you actually have any?
Hiring freelancers, on the other hand, is usually pretty simple, since none of those laws apply.
The main risk, say, as a Canadian, is if I visit a US-based client, then I can't be officially "working while in the US", but it's OK if I do it remotely.
I freelance for my local Canadian company, and if my company sends me to the US, then it's fine, because the client pays my company, who then pays me. The US company is not paying me directly.
Without a valid work visa, they might not even let you (Canadian going to us) into the country. We’ve had salesman turned back when doing training cuz the border guards thought a fee was involved. Sales support was ok.
Yep you have to be very careful in how you express your intent.
I had a friend turned back because he said "the client pays me", when he actually meant "the client pays my company, and my company pays me" (he had an incorporated 1-person company, not freelancer).
When I was purely freelancer, I would say "I'm going to see a client, but it's only social, I'm not paid". Customs would frown, but let me pass. I've even had an agent argue "so you have nothing else to do on a weekday, and your work-friend either?" to which I said "yep, we're computer nerds", and he let me pass.
The Interstate Commerce Clause allows the Congress to regulate interstate commerce. This is not that. If you hire an employee in a different state, you are establishing a business nexus in that state and subjecting yourself to its' laws and regulation - it's not a conflict between two states, it's just between you, the business owner, and the state which you have now established a nexus in.
The employee working in the state (in this case California) is a physical nexus of the company within that state. There's no reaching outside the state's jurisdiction, the company literally has a physical presence inside the state! Just because it's not using commercial real estate (offices) or doesn't have customer-facing shops there doesn't magically make the employees working there non-physical.
> Quebec can zing you if you hire a Quebec resident and aren't prepared to allow them to work in French, even if they don't speak French themself.
For the uninitiated, this means having all UI elements in French, (OS, software, ...) as well as all things physical like keyboards signs, everything.
Even if for example I am perfectly capable (and actually prefer, to lookup errors messages online for example) of working in English, the OQLF still requires Quebec employees to be exposed to French language first and foremost, regardless of users preferences.
Source: IT Guy being on the receiving end of said directives.
How are these regulations handled in a practical sense?
Are employees shipped equipment and served internationalized documentation that defaults to French, and then allowed to choose their preference afterwards for all services and applications?
The companies I worked for are headquartered in Quebec (with the exception of my current job), so I can only confidently comment for the "internal to Quebec" situations. I recently joined a company that was acquired by a bigger US company, and now all company wide communications are bilingual since then. ERP was already bilingual since the 90s as my direct employer is basically Canadian-wide.
I know the basis of these regulations is to give Quebec employees not fluent enough in English the power to ask/require a fully French environment. I BELIEVE this can escalate up to the OQLF being able to fine companies not being able to provide a French environment to their employees, but don't quote me on that.
As far as english language software is concerned, most Quebec employees have a varying degree of "letting go" on this matter when confronted to English messages, as long as their internal documentation/knowledge let them know what messages are considered normal in their work process, even if they don't understand fully what that means. The OQLF, however, believe this is a major problem to be dealt with yesterday: IT HAS to make available said software in their French version, if the software publisher actually publish a French version. If not, I believe you are encouraged (forced? not fully sure) to ask the software developer about availability.
Even if the software developper released a broken (or even partial!) French version using Google Translator, it becomes THE version to deploy, no buts.
This might have a min-size component, but forbidding a Quebec resident from working in French is a Bad Thing. Language laws are onerous enough that some companies do not do business in or even deliver to Quebec. And their websites block transactions accordingly.
There’s all sorts of other Quebec/Canadian taxes and fees. Thought hiring contractors pushed the hassle onto them?
>don't hire remote employees living in a jurisdiction whose employment laws you don't know.
If you read the blog post, you can see that I fully knew and complied with the employment laws. (I used Gusto, as it happens). The blog post has nothing to do with employment laws.
The blog post is about income taxes, the franchise fee, Sec of State filings and absurd amounts of paperwork.
The crux of your argument was that a state should not have their laws imposed on you due to the state’s definition of a “business nexus”.
I didn’t read the comment above as accusing you of not following the laws, but of being caught off-guard by your business falling under the jurisdiction of the state, and disagreeing with that. You said in the blog post that you were surprised by this, and that implies that you “did not know the employment laws” prior to hiring a person residing within that state.
In other words, you assumed that only laws within the state where your business was registered would apply, which was incorrect.
Unfortunately it doesn't matter what you want to call the law. If there is a law that requires you to do something when employing California residents, that is de facto an employment law, and the point still stands.
I do wonder how OQLF will deal with WFH now. They once inspected my former employer's office and we had to silly things like ensure every computer had a French keyboard, even if the employee was English speaking. Just in case a French employee were to use it one day? Now, working remotely, what will they do? Come to my house? Inspect my basement? Hah!
I would love the OQLF to try. On my main PC, I use an Ergodox clone, basically a kind of split keyboard. Keycaps for said keyboard are tricky to find in sets that fits for every key (unless I buy them per piece I suppose), and that's for a basic English-US keyboard. Anything else is virtually unheard of- let me know if I am wrong. Anyway, using English keycaps is a big no-no from the OQLF and would require me to switch, but to what?! Here's the kicker: I am typing that with the Bépo keyboard layout, basically a French Dvorak. This would require me to make a special request to a keycap maker, as anything non-alphabetic is really different. So installing a blank keycap set with unmarked keys would be the cheapest way to go about this problem, but I don't think this would pass the OQLF requirements neither.
OQLF suggests but in no way requires the Canadian Multilingual keyboard. Typing in French, with associated keys properly marked, is what matters to them.
That's a nice keyboard you have, would be a shame if you had to apply stickers to the keycaps! I'm not even joking, IT distributed sticker packs with all the french chars on them after the inspection. Afaik nobody actually used them. I imagine they would become a sticky, fuzzy, nasty mess after prolonged daily use.
> IT distributed sticker packs with all the french chars on them after the inspection
They had to. It's either "Product maker has to provide you the French labels, or if they don't, print your own". Literally. I remember a certain VoIP desk phone company shipping us "universal" labels with graphic symbols, that was considered acceptable by the OQLF since there were no english words.
IT has generally a bad opinion on OQLF precisely because of these kind of ridiculous requests they have to comply to.
The language police could care less how non French workers operate, merely that it’s fully possible for Francophones to operate fully in French. Maybe this is limited to 26+ or 50+ sized companies but I escaped years back. They’re quite aggressive about this and don’t care about the impact. Walmart, for example, needed to add magasin and KFC was PFK etc.
Wait... Walmart is too English? It's been a while and I barely remember life from before the pandemic anymore, but I'm pretty sure it was still Canadian Tire and Target, not Pneus Canadiens and Cible.
I do wonder if Québec is poised to miss out on some of the shift to a remote economy in tech? If Québec-based companies can hire remote employees outside the province, but non-francophone companies can't hire remote employees in it, then that seems like it might lead to a net loss of jobs.
I talked to my employer about moving to Montréal a while back, because I love the city, and we're all remote anyway, and perhaps I'm a sucker for a brutal winter too (but OMG the summer), and they told me in no uncertain terms that no definitely not. It turns out it's one of the few places on the continent employees can't live, because it's just not feasible for us to comply with la loi 101.
This became a concern last year when companies were allowing Work From Home (WFH) but people were taking it as Work Remote. WFH means working from HOME not from a coffee shop, library, etc. And it certainly means not while in another state/country. It complicates taxes. I can see companies that allow WFH or Remote Work clarifying and forcing employees to sign an agreement regarding these clarifications and the employee must indemnify the company and pay for any additional tax compliance expenses and/or government fines [to the company] should they violate them.
I can see companies that allow WFH or Remote Work clarifying
My employer did just this. Nothing crazy restrictive (or at least nothing unexpectedly so, given the nature of local taxation etc). IIRC, it's basically "if you're going to work somewhere for more than 2 weeks, you need approval from your management chain (who has to submit requests to HR/payroll)."
There was additional language about international travel. We have many Indian (and other immigrant) teammates living in the US who travel home for extended periods.
I did just shy of 2 weeks in Florida earlier this month, all that required was a heads-up to my direct manager, no approval required.
My employer did the same thing. They told all of us that they understood if we moved around because of the changing situation, but not to work from outside the state without approval.
2 weeks sounds a bit restrictive. I was under the impression that 6 months was the guideline to establish residency. I know several people who worked in the East Coast/Hawaii for multiple months, including myself, without letting their management chain know. We did eventually get e-mails warning us about tax implications, based on VPN usage, but no follow-up.
It's not, it's generally the line for a specific state to care. We've had consultants at my current employer who have to figure out exactly how many days they've spent in Arkansas because Arkansas wants income taxes for the days they worked in state. Technically even one day working in Arkansas triggers this... to the point we've had people refuse to work on that client because it seriously complicated their taxes.
>In the United States, the jock tax is the colloquially named income tax levied against visitors to a city or state who earn money in that jurisdiction.
This is just someone who started a business and didn't do 10 minutes of basic research. It's not a secret that if you do business in a state (eg by hiring an employee), you will be required to register in that state and pay taxes.
There are thousands of "10 minutes of basic research" items. You can point at any given one of them and show how easy it is to understand, but the sheer number of them makes the endeavor daunting. To navigate properly you need to hire lawyers, accountants, human resources. Possibly multiple times, to get local expertise in each state. All for a business that produces negative income to start.
Hiring those professionals, or having them available for consultation, is a core requirement for starting a real business. If you didn't budget for that, that's a poor reflection of you as a founder.
Just because it currently is that way doesn't mean it should be that way. This tax situation explicitly penalizes and actively discourages two guys starting up a single business in their respective garages across state lines.
Imagine if Jobs and Woz were starting today and lived in CA and OR. That version of Apple would have never gotten off the ground due to idiotic laws like this.
No, you really don't (human resources? Please). Nor are there thousands.
I, like many other people -- and I'm not a genius, nor an attorney -- have managed to run a small business in accordance with these rules. Was there sometimes a consult with an inexpensive lawyer around hiring, or an accountant around taxes and payroll? Sure, but that was it.
So you do business in California and are somehow surprised when California regulations apply to you?
$800 of fees in order to be able to hire a software engineer remote from California shouldn't really be a major factor for any tech company looking to hire remotely.
It was a one-employee "company" (besides the founder). I don't think that qualifies as "any tech company". Just try to put yourself in the owner's shoes.
My friend, who was trying to raise a startup, didn't get payments for the product (too early), didn't have VC funding (yet), had to close the California presence because of such expenses.
> So you do business in California and are somehow surprised when California regulations apply to you?
The surprise - a part of - was that hiring a person in California means doing business in California. On one hand, yes, it's a business-related relationship. On the other, doing business has some other well-established definitions - that is, selling products.
I doubt with all the globalization and outsourcing that was happening last decades everybody was assuming this was the case. I think for many smaller companies hiring somebody externally didn't mean they needed to apply that place's regulations.
Very well written. Mirrors my own experiences with the California tax system as well.
> Congress needs to pass a law that says that hiring a remote employee in a particular state does not, by itself, create nexus for sales or corporate income tax purposes.
As far I understand, Congress does not have the authority to override the states in this way. I don't think it should either.
> stay out of California, and never hire anyone who lives there.
This is the correct way to deal with 'greedy states'. Don't give them the time of day.
I suppose it could be, since the commerce clause is also routinely cited as justification for "war on drugs" type of efforts. However, I don't think it is as clear cut as you make it. A contract executed in one state is not automatically interstate simply because the parties to the contract reside or operate in different states. It matters where the contract is executed. A contract can state things like "will be judged in an XYZ court according to XYZ law".
Choice of laws clauses don't really impact whether commerce is interstate. If goods or services are crossing state lines, it is interstate commerce (and not in the fuzzy might-indirectly-impact sense of Wickard v. Filburn, though even that is settled law), regardless of whether there are choice of laws clauses in a contract governing the trade that specify a particular state laws.
Just because bits are travelling across the wire and the digital artifacts happen to stored in Kalamazoo does not mean services or goods have crossed state lines. Otherwise, using a telephone to talk to your employee or customer in another state would involve crossing state lines. That simply isn't the case in the normal course of business.
The fact that this conversation is this complex gives me a feeling that remote work is going to be the backdrop for a lot of court cases in the next decade.
> Just because bits are travelling across the wire and the digital artifacts happen to stored in Kalamazoo does not mean services or goods have crossed state lines.
Yes, it does.
> The fact that this conversation is this complex
I like that you not only inject false complexity into the conversation, but also pretend that that act is some kind of external fact that proves something about the underlying issue.
In what way are the states "greedy"? They're not hoarding the tax revenue. They're spending it on their citizens. Greed that is not. You may disagree with their allocation of tax revenue but calling it greedy is nonsense.
It's greed because the pain the cause with respect to compliance is not proportional to the amount of revenue they produce. They are willing to cause a lot of inefficiency in other states for a trifling amount of money.
The cost is $800, and the author probably spent tens of thousands of dollars in time and energy figuring out how or if they needed to pay it. That ratio is not a good tax system!
You think an $800 barrier to entry is a positive effect on small business in California? Do you think it's a positive effect on remote workers entertaining an out-of-state employer?
If you want to have employees in secondary jurisdictions without having to deal with the specifics of operating within them, you can hire folks through a Professional Employer Organization (PEO) like Deel [1]. They'll take them on as full-time employees, pay benefits, handle paperwork - and assign them as full-time contractors to your business. No nexus for you, and full employment for the person working for you. It's not cheap, ofc, but hopefully your employee is generating sufficient value :)
You just learned a valuable lesson, there is a regulatory burden to run a business. There are all sorts of issues like this regardless of whether you hire in California or any of the other 49 states.
Personally, I wish that the states didn't make it hard to do the right thing and pay appropriate payroll taxes and witholding for state income taxes. But unfortunately, there's a Byzantine process to register the business with the appropriate agencies just to set up payroll.
I really wish the US came up with a solution to this. It would help a lot with making it easier to start a business if there was one online portal where you could go to do this instead of registering for 5+ systems for a single state and being clueless about what your requirements are for other states (unless you can afford an accountant who is very familiar with it all).
> unless you can afford an accountant who is very familiar with it all
I mean every business that isn't a pass-through LLC needs accounting/legal services. If you can't afford them then you probably can't afford to be in business yet.
I think the process is dumb, and could be improved, but really it's not the job of the federal government to streamline any of this. I'd rather that states modernize their systems and regulations for modern businesses. I wish my home state did this (among other things) to attract startups, because its easy and has a high payoff. Unfortunately I think the incentives are broken for politicians and bureaucrats.
That's just a rookie business owner mistake. He should have used something like Justworks to handle the "employee" part of the business until he grew enough to have a dedicated HR person.
Totally off topic, but I loved JustWorks sooooooo much. When we got big enough to hire an actual dedicated HR department, people were unhappier in comparison, though JW is pretty expensive past a certain scale so it makes sense. It's like Heroku for the employee part of the biz: use it starting out and until you scale and then switch to something less expensive but more time consuming.
+1 for Justworks. There are other competitors like Gusto (I think?) that do it too. They have the tax and regulatory stuff figured out for every state and city and are basically the actual "employer" for your employees. I think it's called a PEO
> Nexus should only be created in the traditional way: by selling something in the state, or by having a physical office there. Without this law greedy state governments can send companies nasty surprises, as they did to me.
I mean, you had an office in their state, it just happened to be a home office, so...
Too many people are coming down on OP unnecessorily. He started 1 person business which never took off, had no revenue and ended up having to do massive paper work 3 years later that seems akin to colonoscopy. I would have never imagined that hiring a remote worker in California for a tiny little startup means this level of trouble. OP is absolutely right that CA does not allow for enterprenuership spirit and it is currently surviving on wave that was created by pioneers in much more condusive environment 50 years ago.
In my opinion someone from outside of CA complaining about CA laws for out-of-state employers has very little to do with the state’s entrepreneurial spirit or the ease of starting a business as a Californian. And more so when the reason for the complaint could have been avoided with cursory research and minimal effort.
When you are two person startup with no revenues, you don't have luxury of going through arcane laws of each of 50 states. You are surviving on ramen in your parent's garage and you can't hire lawyers. As OP describes, there was nothing "minimal" in what CA demands including 40+ pages of forms you need to fill out.
If you’re a two person start up, you only need to worry about maybe 2 states, not 50. This page was all they needed to read: https://www.ftb.ca.gov/file/business/doing-business-in-calif.... Doesn’t seem arcane to me. The 40+ pages is described as an annual tax return. I don’t know what to say to someone who wants to have a SaaS business but can’t get 40+ pages filled out annually.
I think the notion that people do not get social security credit if they are on 1099 is flawed. People on 1099s pay their half of the payroll tax that would be incurred by an equivalent W-2 employee. This is known as the "Self-Employment Tax". And it is for funding the Social Security obligations that they owe.
The part that's irksome about California is the personal income taxes. You can check into Hotel California but you can never leave. The FTB has been known to go to ridiculous lengths (it has been alleged that they went digging in people's trash) to collect or otherwise establish a basis for taxing people no longer in the state.
Many startup founders move out of CA well in advance of liquidity events, establishing domicile in FL or some other low/no-tax jurisdiction to avoid the hefty 13+% rate that CA imposes. I'm sure they are advised by very capable (and well-paid) lawyers. It would be nice if regular people could also get this advice for a reasonable price but I doubt it.
I suspect CA will get even more aggressive as the exodus of high income earners continues out of the state.
Stop being so pedantic. It's worthless. You had an employee, and so you were doing business in the state (this is business 101 stuff). By having an employee, you were subject to certain laws California has. e.g. You literally didn't comply with everything you were required to.
Worthless is CA charging every person even attempting to make money in CA (or in this case, in partnership with someone in CA) so much money and wanting 100 pages of forms filled out.
This is less a California issue than a US remote business issue. Any number of states have labyrinthine regulations regarding who must file corporate income taxes, who owes state sales taxes, how you must acquire unemployment and disability insurance, etc.
And you're just getting started with the states. If you happen to employ someone in a bureaucratic or tax-ridden municipality (e.g. Philadelphia, Seattle, NYC, tons of others), then you are going to have processes to file fees and paperwork with obscure offices and locally sanctioned accountants (looking at your Pittsburgh) and insurance companies.
Arizona sued California for extraterritorial tax assessments and enforcement where California was assessing a minimum $800 tax on Arizona businesses who had a passive investment in a company that happened to do business in California.
Example, you are an Arizona company who passively invested in a Neveda company that happens to have California customers. California FTB was claiming the Arizona company was doing business in California and owed it a minimum $800. California started garnishing the bank accounts of Arizona companies that ignored it.
I'm happy to live in California and have a social safety net when I lost my job during the pandemic and had over a year of EDD unemployment payments to keep me afloat. In other states, companies like yours dodge all responsibility for society and their employees (for better or worse)
I heard horror stories dealing with unemployment during the pandemic in states like Tennessee or New Jersey.
Not a fan of government bureaucracy but taking care of your employees is part of running a business.
Okay, but the social safety net is paid for by people and businesses. If you make the people miserable and the business difficult, your social safety net cannot be funded by good feelings.
Also, considering the high cost of living, homeless encampments rife with 18th century communicable diseases, and staggering crime, I'm not sure how safe your net is.
Sounds like from the article California is actively disincentivizing companies from hiring W2 from there on a remote basis. If companies are incentivized to do 1099, how is that helping anybody?
On the other hand by living in a state with no income tax I can save that money for retirement or if I'm unemployed. I'd rather manage it myself than having the state manage it.
There's a serious cost to allowing you to manage it yourself - many of those who are "managing it themselves" do not understand that they're in charge of their own unemployment or retirement, and even of those who are, some proportion will go bust through essentially no fault of their own.
Now, the state has a bunch of citizens who are unable to meet the basic necessities of life in situations of unemployment or retirement. Is it really appropriate to let these people become homeless? Die in the streets?
Some people prefer to "take care of their employees" by paying them well instead of funding a social safety net. That's not "dodging all responsibility". How about you just take a higher paycheck and save it yourself? As for me, I won't hire in California now for exactly this reason, I am not going to fund their soycialist programs (like EDD unemployment).
I also pay the $800 tithe, because I live in California and manage my marginally unprofitable property LLC in another state.
California has a lot of things going for it and I appreciate the purpose of taxes, but at this point I'm viewing it as an $800/year incentive to leave.
This is pretty basic "running a business" stuff. If you think paying a few hundred to an accountant is a nuisance, you're probably not that serious about running a business anyway.
This is true of employment, remote or otherwise, all over the US. Wait until you start an LLC with partners in different states and incur personal state tax liabilities in states you've never set foot in. This is a complaint that more suggests the lack of experience this person has with employment than any problem with how tax law works.
Sure, but if his employee had been living in, e.g., Missouri, he probably wouldn't have to pay anything near $800 a year (the minimum franchise tax in CA) like he in actuality has to, nor pay his accountant to fill out a form 42 pages long.
Lots of pissed of Californians in the thread because it reduces their value... but if you think from outside, it is very reasonable argument... and this article is a service to the people who would otherwise not have thought about this.
California wants to maximize benefit to their citizens as it should... and outsiders should take that into consideration when doing business with entities in California. Also this was probably not straightforward to find out... which is why the author thought spreading the word was important. I appreciate it.
Hiring in California is expensive and burdensome. Further, I think California is pretty sophisticated in its remote-business tax-hunting capability. That does make it a relatively bad target for hiring remote employees in a global-competitive environment.
So perhaps you can hire people elsewhere and avoid tax obligations more easily. If so, this is smart business. States and nation-states that let employers get away with such behavior are losing out on reasonable tax opportunities.
Disclaimer: I live in California, and I am not pissed off nor do I find my value threatened by this thread.
Yeah for years Calis' massive economy has allowed them to squeeze more from people in taxes and fees and laws. They've managed to basically pass laws for the whole country a bunch of times by moving standards in such a large economy. But now they're going too far, and capital is leaving, and people are leaving, and the state is collapsing slowly and the urban areas are going bad and I will not cry while this happens. Especially not after the years of sanctimonious holier than thou bs out of Calis about how much better they are. I just hope all the refugees don't vote for the same BS when they flee to Texas.
Without such rules as the article describes, businesses predominantly active in California would just incorporate in Delaware and say "You can't touch us!"...
A bit like how Starbucks, Amazon, Apple in Europe all have the suffix "Luxembourg, sarl" because being incorporated there means they can pay less "local" taxes in other EU countries, thanks to Luxembourg's tax-haven-establishing PM who even got the job of President of the European Commission afterwards. Thanks for funding the penis-rocket, Jean-Claude!
The countries you mention pay employee taxes and VAT in the countries where they operate (employ or sell). This is huge in comparison with the profit tax, so operating from Luxemburg is shaving a few percent of the overall total, nothing more. Each other state gets their part in full. What California does is very, very different.
@dang Someone edited my headline in such a way that it ridicules the blog post and does not reflect the topic. Questions: 1. Who gets to edit headlines? 2. Is doing this ok?
Original: Don't hire remote employees living in California
Current: I employed a California resident, so now I’m subject to its regulations
Yeah, we hire remote, as long as you live in one of the two states we’ve established a presence. The cost and overhead is way too much otherwise (and we do use a PEO, that doesn’t remove the business license and taxation requirements).
"But a W-2 an employee gets payments into social security, unemployment insurance, various protections, so it’s the decent thing to do, even if it costs a bit more."
You can adjust for those costs and pay the contractor more, ie you say to the contractor "look we understand you have to pay for your health insurance, self employment tax, etc so we are going to cover those expenses with more pay."
Of course it doesn't feel like it - the contractor still has to pay those things on their taxes which never feels good. So there is the psychology behind it - a W2 employee being paid less might feel better about their tax situation because they don't as much in taxes. Well, they do pay, but that money never reaches their bank account.
My entire company is remote (~60 people) and we have to pay a few hundred dollars per state and filing fees for having any employees in that state. We're in 15 states and the cost and time (paperwork and jankiness of their govt websites) ranges quite a lot.
It sucks, but it's just the overhead of being a business. Businesses gets tons of benefits in the US and this is just the other edge of that sword. As others have noted, this could just as easily about any of the pitfalls of hiring in your same state, across states, or across countries. Hiring international folks is a whole rats nest of complexity that business owners need to be aware of.
Systems across the world, through corruption, are being built so that only big players can remain on the market.
Running small and medium business is increasingly more expensive and eventually becomes no different than just regular employment in terms of reward.
The goal is to ensure that talented people can't go on their own and their only way to make a living is to become an employee of big corporation.
Business will be reserved only to those "born correctly" or somehow gotten respect of one of VC funds (essentially gatekeepers who tell who can and who cannot do business).
> So now they’ve lied to me about my income and demanded information that is none of their business.
I mean, not to be too harsh, but... Welcome to inter-state business operations. It's really up to the state what is "their business" when you are employing one of their citizens; that's the consequences of a system made of a federation of states, each state can set its own rules above-and-beyond federal rules in a pretty wide latitude.
There's a reason people hire lawyers to handle this stuff.
Soo... when people tell me EU is an evil behemoth ran by a grey mass of Eurocrats in Brussels, delivering no value but complications... erm no, I don't think so.
You do realize that it's the exact same way in the EU, if not worse? In the EU, a company can't even hire you if you're from another EU country where your company doesn't also have a seat there...
Sketching out a business plan with some estimates and then having that reviewed by an accountant usually costs a few hundred bucks or less and can save all kinds of hassle by disclosing all of this in advance. This is especially true if doing business in another country but nowadays states in the US have wildly different labor and tax laws so it is also worth doing here.
Hiring a lawyer to draft (or really just pull from a file) employment agreements is also going to be dirt cheap. And they'll tell the employer, by the way, they'll have to pay a small annual fee to the state, too.
($800? Are we all really talking about a measly $800!?)
I have a lot of sympathy for the author, but California isn't really doing anything wrong here.
> I decided to do the right thing by switching to W-2 payments.
BTW, there's nothing inherently morally wrong with 1099/contract work. There are additional costs for the contractor, but you simply build that into the rate.
It's also not that hard as a W2 to leave California. I just had to do partial tax returns for each state. California hasn't pestered me since I left nearly a decade ago. I've also done 1099 work for California companies from outside California without hassle. (I loved living in California, for the record, but I always crave change after a while.)
But when doing business that's partially in California, then yes, it's a significant entanglement.
California's a great source of tech workers, and bigger companies shrug off these costs. They're charging what the market will bear. But, like TFA says, I'd do my research if you're a smaller company outside California looking to hire someone in California.
If only congress had that power, but the United States of American really are the "united states" of America, not "the country of America", and even folks who live in the US often forget that the federal government really doesn't have a lot of power in regulating how states run their affairs.
Congress literally can't pass the laws the article proposes: it does not have that power. Would be nice if it did, would certainly make the country a better place for the vast majority of people, but as it stands: each state is basically equivalent to a country, with a formal agreement to collaborate as part of a federation, but with express limitations on how much the federation as a whole gets to "interfere".
Did other people reach the same conclusion: that it would be good to have a stronger Federal government that can take over states' rights?
I agree that California is bad for remote hiring, and I believe that this is a novel competitive advantage for other states to capitalize on. Asking Congress to "fix" California would starve North Dakota, for example, of the opportunity to make it super tax-cheap to hire remote employees.
Let California tax-implode during a time of unforeseen redistribution of labor.
I don't agree with the conclusion that a stronger Federal government is necessarily a good thing. Though even if that is someone's conclusion I don't think it is worth downvoting. It seems like more users are treating downvote as "I disagree" these days.
> Let California tax-implode during a time of unforeseen redistribution of labor.
Yes. "You made your bed, now lie in it" is good policy methinks.
Conversely: if California tax-implodes, tens of millions of people are going to be affected, and not in the "no avocado toast for you" sense but in the "you can't make your rent anymore, I hope you like living on the streets" sense.
May California go through many tax-reforms, appropriate to modern practices and expectations, sparked by cases like these, but may it never tax-implode.
While I don't have a lot of empathy for the author who stubbornly charged blindly into this situation I think there is very real problem here. Small businesses are more global than ever before and it's fairly normal for a business to want to hire an employee in another state. Making it prohibitively expensive to do so in the sense that the minimum bar is to consult with a lawyer about all the implications and use an accountant to fill out the paperwork pertaining to those implications significantly curtails the options available to the small business.
I feel the OP pain because if you are small with less than $1m of funding, you are unable to do anything if you want to stay compliant. And compliance seems to be an un-ending stream where every other organization is trying to impose its rules, taxes, fees and licenses.
I have also had first hand experience with simplification: Medium businesses will aggressively optimize over these simplifications. Big businesses will try too if they can apply. The government then starts reverting these simplifications with amendments that make the situation worse than when it started.
One workaround for this is to have the employee "payrolled" through a temporary agency.
They handle the paperwork, and all the state compliance. The markup over handling this yourself is smaller than if the agency locates the employee themselves.
Any national agency like Manpower can handle this, as well as smaller local agencies.
Then you have a vendor and not an employee.
Get competent legal and tax advice before doing this. And I can't guarantee any particular agency will be interested in dealing with a small operation. Better luck with a small local agency in the state/province in question.
Amusingly, I once had to file a small() Illinois state income tax return because I earned income from a consultancy based there. At the time I lived in Texas and the work was done on a server in the UK for a European client. I suppose perhaps some of my ssh packets went through Illinois?
So I'm a bit tickled to see someone living there bitching about tax agency overreach.
() it cost more in additional tax prep expense than the final return amount was, additional salt on the wound
If I read the linked FTB page correctly, either 25% OR $63,726 of payroll is the threshold. So pretty much one, maybe two employees should do it regardless of percentage.
People in this thread who are like, "Duh, you should have known that you have to hire a lawyer and HR person and an accountant to comply with all the regulations of California when you a hire a single person from there."
Take a step back and think about what you're saying. It really should not be that difficult to hire one person.
Our tiny remote-only startup is based out of Texas. We've been in business one way or another for about 3 decades now. We still have yet to hire a single employee who resides in the state of California (or NY). This is actually the first question HR will ask me when I bring in a recommendation that is not in their system.
Once OP wrote that sentence about "ridiculous" California taxes, the jig was up. He just wants to complain about California because he's associated with the Republican Party. His site has other partisan culture war content. I think in that context, this article can't be seen as good-faith business advice.
He depends on California's business environment (their highly educated and productive labor pool), and then turns around and complains about California's transparency requirements, which from my first impression seem to protect the state from shady business practices.
Yes, if you own a business and have W2 employees, there are extra pieces of information the state needs from you. You can't just throw up your arms and say that they "demanded information that is none of their business." Maybe I should tell that to the IRS that the next time they "demand" my W2 and 1099 forms, I'm sure that they'll say "you're right, it's none of our business."
I also want to point out that California doesn't have "ridiculous" taxes, there are 8 states with higher overall tax burdens, and the next 15 states with lower overall tax burdens are within 1 percentage point difference: (https://wallethub.com/edu/states-with-highest-lowest-tax-bur...)
Overall, I would have a hard time believing that the world's 5th largest economy is a bad place to conduct business.
"Nobody lives in California, there's too much traffic."
If you are thinking of starting or running a business, you should have at least a brief consultation with a small business lawyer on your to-do list, or else you'll end up having to write a blog post.
I am a 1099 remote employee billed via my LLC for a business not in California and I am afraid of working\vacationing for an extended period in CA and getting caught up with the FTB rules and regulations.
Wow thank you for sharing the story, such a great lesson, it's sad to see how hard is getting to do a small business in US, the country of opportunities :(
I fully agree with everybody that this is a rant for an unexpected issue (that should have been expected), rather than an objective review.
I do agree with the notion that there should be a single way to do taxes across the country. But from everything I hear and understand, that'll never fly in USA "because freedom!". I think that in most of Canada (Quebec possible exception), you essentially file federal taxes and then provincial taxes are a mirrored percentage of that? I think law is more complex than that but a regular person's experience feels like it.
What are the chances OP has a cultural/political axe to grind with California, and mistakenly attributes the difficulty of hiring across states to some sort of "general jackassery of California state government"?
Context:
"The head of the Chicago Republican Party, Chris Cleveland[author/OP], has accused the Chicago Board of Elections of 'massive incompetence or massive fraud'"
My takeaway from this article (and from my experience incorporating and dissolving an LLC in California) is that there needs to be better education regarding how to run a small business.
There is a ton of content on how to code in X language or understanding X technical concept, but I haven't discovered too much content on starting a small business in X state.
AB-5 added exemptions allowing more employees to be contractors to the pre-existing rule articulated, based on prior statute law, by the California Supreme Court.
right but you can also just wait for California to challenge the 1099 distinction
OP wanted to be an employer and "make jobs" for the sake of printing job numbers, rustbelt mentality.
if they had more employees, elsewhere, it wouldn't have happened, if they actually did have the relevant counsel it wouldn't have happened. but they aren't able to or willing to afford either. lesson learned. likely the wrong lesson learned.
You're absolutely right. I am personally to blame for Illinois' tax rate, gun violence, and financial condition, and I really shouldn't talk. I'll go quietly now...
Moron here. I did pay employment-related taxes. I don't owe income taxes, because I had no income there.
This blog post is about excessive paperwork, surprises, unnecessary income tax filings, and the franchise fee. And the fact that California is uniquely aggressive among states in pursuing this stuff against a startup.
These days anything anti-California and anti-liberal is guaranteed to be voted to the top over here regardless of quality of the content. It's crazy how things have changed over the last year or two.
This isn't really news. 15 minutes of reading about staring an LLC in Deleware and you'll find you have to register in the state you live as well - so it shouldn't be a shock you have to file in places you have employees.
1099 is definitely the way to go for as long as you can - people still get social security credit.
IANAL, this isn't legal advice, blah blah blah