Tax confusion worries San Francisco businesses

Robert Alexander/Getty Images

Robert Alexander/Getty Images

San Francisco’s payroll tax again is causing alarm after business owners were told that money spent on workers’ medical benefits and cafeteria plans was subject to the assessment.

While the federal government may exempt such employee costs as commuter benefits, medical reimbursement accounts and cafeteria plans, San Francisco does not. But not every business owner is aware of that, and it could mean The City is owed millions in back taxes, interest on the payments and penalties, according to Scott Hauge, president of advocacy group Small Business California.

Hauge said business owners were unclear about the payroll tax being applied to cafeteria plans until the tax collector audited their books. They were assessed penalties and forced to pay back taxes.

Jim Lazarus, public policy director for the San Francisco Chamber of Commerce, said business leaders met to discuss the concerns.

“There’s some confusion by some taxpayers,” Lazarus said.

Just how many companies are incorrectly reporting payroll taxes is unclear to business advocates and the tax collector.

Hauge said the rules should be changed. There is no precedent for taxing cafeteria plans, he said, and he wants The City to adopt an exemption.

“To tax that stuff is crazy,” Hauge said.

And to help businesses that erroneously reported payroll taxes, Hauge suggested an amnesty period.

“Nobody is trying to get anything out of anybody,” he said. “It’s so hard with government, knowing all the rules.”

Recently, several changes to the payroll tax were made to keep businesses in town. Twitter was given a payroll tax exemption for moving to the mid-Market Street area, and a tax break was established for stock options if a company goes public.

Greg Kato, a spokesman for San Francisco’s tax collector, said The City’s payroll tax is a levy on the gross compensation paid to an employee for services in San Francisco. Kato “couldn’t really say” how many businesses might be improperly paying the tax, but he said the department does hundreds of audits annually.

Last fiscal year, 663 audits were conducted and $2.5 million in owed taxes and penalties was recovered. The year before, $7.6 million was obtained. The City can audit a business’ tax record going back three years.

The 1.5 percent payroll tax is expected to generate $390 million this fiscal year.

There was $100,000 budgeted this year for an economist in the City Controller’s Office to come up with a new way of taxing businesses, with the aim of placing it on the November 2012 ballot.

“It goes to the whole issue of payroll tax reform, which is on the table,” Lazarus said. “It’s another reason perhaps why it would be helpful to find another source of revenue.”


Paying to do business

San Francisco assesses a tax on the payroll of certain businesses.

  • 1.5 percent: Payroll tax
  • $250,000: Payroll threshold that triggers tax
  • $390 million: Amount city expects to collect in payroll tax revenue this fiscal year
  • 80,000: Businesses in San Francisco
  • 6,000: Businesses subject to payroll tax

Source: Treasurer’s Office

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