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.
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?