On November 4, 2008, San Francisco voters approved Proposition Q, which updated the Payroll Expense Tax Ordinance with two main changes.

Beginning with calendar year 2009, a business whose total taxable San Francisco payroll expense for the year is $250,000 or less (previously $166,667) will qualify for the Small Business Exemption.  Businesses meeting this new threshold are exempt from paying the 1.5% payroll expense tax.  However, they are still required to file a form and report their payroll expense by the annual deadline in order to avoid penalties and fees for late or non-filing. This is a win for small businesses.

However, Proposition Q also imposed an onerous tax on owners of pass through entities.  The applicability of payroll tax expense is now extended to include compensation for personal services paid to owners of partnerships, LLPs, LLCs, and S-Corporations.  Compensation does not include any return on capital investment.  Businesses will need to include this type of compensation on their 2009 Payroll Expense Tax filing.  A safe harbor calculation for businesses with at least 4 employees is available.  The calculation is 200% of the average annual compensation paid to employees whose compensation is in the entity's top quartile.

If you need assistance in completing the form or in determining taxable compensation, please contact us.

If you have any questions regarding this issue, please contact the DZH Phillips Tax Department at (415) 781-2500 or email cpas@dzhphillips.com. 

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• To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained herein (including any enclosures or attachments) was not intended or written to be used, and cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions.