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State Taxation 10/29/2009 2:41:24 PM EST A Halloween Tax Horror Story California Gets Free Use of Extra Withholding Dollars
Halloween is a scary time of year for parents. This Halloween is a scary time for California taxpayers. California taxpayers have long realized that paying their heavy tax burden is no treat. However, I doubt many taxpayers saw this trick coming, as well.
It should be no surprise to anyone that before November 1, 2009, California prepared wage withholding tables to be used by employers for withholding taxes on wages. In lieu of applying the withholding tables, an employer could withhold a rate of 6% with respect to supplemental wages, and at a rate of 9.3% with respect to stock options and bonus payments.
Nightmarish Taxes. Starting on November 1, 2009, the California wage withholding tables will produce a sum that is equal to 10 percent more than the sum specified for purposes of the withholding taxes. This is like a little bonus withholding for the state. For example, the in lieu withholding rates increase to 6.6% for supplemental wages, and 10.23% for stock options and bonus payments paid after October 31, 2009. After that date, Sacramento will withhold 110% of what they estimate we owe.
Spooky News. Many taxpayers will be terrified to learn that beginning on November 1, 2009, their California taxes are increased by 10 percent. “Shocking” you say? Yep. Sacramento played this trick on us without ringing our doorbell.
The Dark Economy. This change in law was enacted on July 1, 2009, as part of the emergency law provisions used to solve the state’s budget crisis. See Cal. Rev. & Tax. Code Sections 18663; 19025; and 19136.1. See also, California Unemployment Insurance Code Section 13020.
The Really Scary Part. Interestingly, the legislature would argue that there is no tax increase at all. Taxes are the same. Only withholding was increased. A tax increase requires a two-thirds vote of the legislature. Here, the legislature only increased withholding by 10 percent pursuant to a majority vote.
The Tale Gets Worse. You might say to yourself, “No problem, when I file my California income tax return, I will get the additional withholding returned to me in the form of a refund.” And you will. But before you even begin filling out your 2009 income tax return, the state already will be collecting the same additional 10 percent withholding on your 2010 income. You see, that additional 10 percent withholding is collected year after year, so in truth you will never get that 10 percent back. It just rolls over to the next year, and then the next. Your descendants might get the final refund back, but for you, this is a permanent tax increase that Sacramento snuck by us all.
Self-Employed Individuals Are Not Out of the Woods Either. By the way, this tax increase does not just apply to wage earners. It also applies to self-employed individuals filing estimated income taxes. Your estimated tax payments will go up by 10 percent. If California previously frightened you with the highest tax burden of any state in the U.S., those taxes are now a petrifying 10 percent higher.
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