I employed a California resident, so now I’m subject to its regulations

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).<p>This isn&#x27;t really news. 15 minutes of reading about staring an LLC in Deleware and you&#x27;ll find you have to register in the state you live as well - so it shouldn&#x27;t be a shock you have to file in places you have employees.<p>1099 is definitely the way to go for as long as you can - people still get social security credit.<p>IANAL, this isn&#x27;t legal advice, blah blah blah

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&#x27;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&#x27;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.

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.<p>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?

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&#x27;t owe more by going through an exhaustive process that is full of footgun questions.<p>Yes, this guy is complaining because he didn&#x27;t read the laws or get legal&#x2F;financial advice before hiring someone in CA. However, that doesn&#x27;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 &quot;unusual&quot;) 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&#x27;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&#x27;m having a hard time imagining that no other state in America would consider that &quot;doing business in the state.&quot;

I started to generall disagree with this post, having had similar experiences with many other states harassing me to make sure I didn&#x27;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&#x27;s really not high compared to the cost of a single W2 employee.<p>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&#x27;s reasources to go through. This absolutely should have either federal or California regulation to correct.

This should probably be expanded to something more like, &quot;don&#x27;t hire remote employees living in a jurisdiction whose employment laws you don&#x27;t know.&quot;<p>Because it&#x27;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&#x27;t list the compensation range on the job listing. Quebec can zing you if you hire a Quebec resident and aren&#x27;t prepared to allow them to work in French, even if they don&#x27;t speak French themself.

So you do business in California and are somehow surprised when California regulations apply to you?<p>$800 of fees in order to be able to hire a software engineer remote from California shouldn&#x27;t really be a major factor for any tech company looking to hire remotely.

Very well written. Mirrors my own experiences with the California tax system as well.<p>&gt; 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.<p>As far I understand, Congress does not have the authority to override the states in this way. I don&#x27;t think it should either.<p>&gt; stay out of California, and never hire anyone who lives there.<p>This is the correct way to deal with &#x27;greedy states&#x27;. Don&#x27;t give them the time of day.

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.<p>Personally, I wish that the states didn&#x27;t make it hard to do the right thing and pay appropriate payroll taxes and witholding for state income taxes. But unfortunately, there&#x27;s a Byzantine process to register the business with the appropriate agencies just to set up payroll.<p>Stop making it hard to hire people and pay taxes!

That&#x27;s just a rookie business owner mistake. He should have used something like Justworks to handle the &quot;employee&quot; part of the business until he grew enough to have a dedicated HR person.

&gt; 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.<p>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.

If an $800 minimum franchise tax is a lot of money to a rookie business owner, you&#x27;re in for a rude awakening.<p>Also:<p>&quot;I have better things to do that deal with idiots in California who think they have the right to impose obligations on my Illinois business.&quot;<p>LMAO.....This does not read like a successful business owner, let alone one who gives reassuring advice.

I think the notion that people do not get social security credit if they are on 1099 is flawed. People on 1099s pay <i>their</i> half of the payroll tax that would be incurred by an equivalent W-2 employee. This is known as the &quot;Self-Employment Tax&quot;. And it is for funding the Social Security obligations that they owe.<p>The part that&#x27;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&#x27;s trash) to collect or otherwise establish a basis for taxing people no longer in the state.<p>Many startup founders move out of CA well in advance of liquidity events, establishing domicile in FL or some other low&#x2F;no-tax jurisdiction to avoid the hefty 13+% rate that CA imposes. I&#x27;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.<p>I suspect CA will get even more aggressive as the exodus of high income earners continues out of the state.

&quot;I didn&#x27;t want to comply with the employment law in the only state in which I had employees&quot; is not a good reason to write a blog post.

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.<p>And you&#x27;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.<p>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.

It just sounds like this person doesn’t know how to run a business and is looking for someone to blame.

Well, good riddance.<p>I&#x27;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)<p>I heard horror stories dealing with unemployment during the pandemic in states like Tennessee or New Jersey.<p>Not a fan of government bureaucracy but taking care of your employees is part of running a business.

I also pay the $800 tithe, because I live in California and manage my marginally unprofitable property LLC in another state.<p>California has a lot of things going for it and I appreciate the purpose of taxes, but at this point I&#x27;m viewing it as an $800&#x2F;year incentive to leave.

This is pretty basic &quot;running a business&quot; stuff. If you think paying a few hundred to an accountant is a nuisance, you&#x27;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&#x27;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.

&gt;But a W-2 an employee gets payments into social security, unemployment insurance, various protections<p>I’m pretty sure a 1099 also gets you those things, but the contractor covers the full employment tax. So you just pay them more.

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.<p>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.

@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?<p>Original: Don&#x27;t hire remote employees living in California<p>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).<p>It sucks for small companies.

&quot;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.&quot;<p>You can adjust for those costs and pay the contractor more, ie you say to the contractor &quot;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.&quot;<p>Of course it doesn&#x27;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&#x27;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&#x27;re in 15 states and the cost and time (paperwork and jankiness of their govt websites) ranges quite a lot.<p>It sucks, but it&#x27;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.

This is the textbook example for &quot;hire an accountant&quot;.

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&#x27;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 &quot;born correctly&quot; or somehow gotten respect of one of VC funds (essentially gatekeepers who tell who can and who cannot do business).

&gt; So now they’ve lied to me about my income and demanded information that is none of their business.<p>I mean, not to be too harsh, but... Welcome to inter-state business operations. It&#x27;s really up to the state what is &quot;their business&quot; when you are employing one of their citizens; that&#x27;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.<p>There&#x27;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&#x27;t think so.

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.

I have a lot of sympathy for the author, but California isn&#x27;t really doing anything wrong here.<p>&gt; I decided to do the right thing by switching to W-2 payments.<p>BTW, there&#x27;s nothing inherently morally wrong with 1099&#x2F;contract work. There are additional costs for the contractor, but you simply build that into the rate.

It&#x27;s also not that hard as a W2 to leave California. I just had to do partial tax returns for each state. California hasn&#x27;t pestered me since I left nearly a decade ago. I&#x27;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.)<p>But when doing business that&#x27;s partially in California, then yes, it&#x27;s a significant entanglement.<p>California&#x27;s a great source of tech workers, and bigger companies shrug off these costs. They&#x27;re charging what the market will bear. But, like TFA says, I&#x27;d do my research if you&#x27;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 &quot;united states&quot; of America, not &quot;the country of America&quot;, and even folks who live in the US often forget that the federal government really doesn&#x27;t have a lot of power in regulating how states run their affairs.<p>Congress literally can&#x27;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 &quot;interfere&quot;.

While I don&#x27;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&#x27;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.<p>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 &quot;payrolled&quot; through a temporary agency.<p>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.<p>Any national agency like Manpower can handle this, as well as smaller local agencies.<p>Then you have a vendor and not an employee.<p>Get competent legal and tax advice before doing this. And I can&#x27;t guarantee any particular agency will be interested in dealing with a small operation. Better luck with a small local agency in the state&#x2F;province in question.

Amusingly, I once had to file a small(<i>) 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?<p>So I&#x27;m a bit tickled to see someone living there bitching about tax agency overreach.<p>(</i>) 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.

Doesn&#x27;t the Universal Commercial Code forbid tariffs for business between states? How does that relate to &#x27;franchise tax&#x27;?

People in this thread who are like, &quot;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.&quot;<p>Take a step back and think about what you&#x27;re saying. It really should not be that difficult to hire one person.

Our tiny remote-only startup is based out of Texas. We&#x27;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.

Yes, CA FTB is <i>gangsta</i>, but I don&#x27;t support the conclusion.<p>First, just because they say you owe something, doesn&#x27;t mean you do. Just make sure your bank isn&#x27;t in CA before standing firm. Ask me how I know.<p>Second, 1099 sounded like a better deal anyway. Why make things complicated for a non-entity (yet)?

Once OP wrote that sentence about &quot;ridiculous&quot; California taxes, the jig was up. He just wants to complain about California because he&#x27;s associated with the Republican Party. His site has other partisan culture war content. I think in that context, this article can&#x27;t be seen as good-faith business advice.<p>He depends on California&#x27;s business environment (their highly educated and productive labor pool), and then turns around and complains about California&#x27;s transparency requirements, which from my first impression seem to protect the state from shady business practices.<p>Yes, if you own a business and have W2 employees, there are extra pieces of information the state needs from you. You can&#x27;t just throw up your arms and say that they &quot;demanded information that is none of their business.&quot; Maybe I should tell that to the IRS that the next time they &quot;demand&quot; my W2 and 1099 forms, I&#x27;m sure that they&#x27;ll say &quot;you&#x27;re right, it&#x27;s none of our business.&quot;<p>I also want to point out that California doesn&#x27;t have &quot;ridiculous&quot; 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: (<a href="https:&#x2F;&#x2F;wallethub.com&#x2F;edu&#x2F;states-with-highest-lowest-tax-burden&#x2F;20494" rel="nofollow">https:&#x2F;&#x2F;wallethub.com&#x2F;edu&#x2F;states-with-highest-lowest-tax-bur...</a>)<p>Overall, I would have a hard time believing that the world&#x27;s 5th largest economy is a bad place to conduct business.<p>&quot;Nobody lives in California, there&#x27;s too much traffic.&quot;<p>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&#x27;ll end up having to write a blog post.

I&#x27;m a Canadian citizen, living and working in Canada. I haven&#x27;t been to the United States in over 3 years. I haven&#x27;t worked in the US since 2018.<p>I am currently paying an accountant to file my California tax return (along with my US federal tax return).

When I had my startup with my partner in Seattle, and I was in California, I always had to pay this. Our accountant was aware of these things.<p>Maybe getting an accountant or a financial adviser would help in situations like this.

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.

Alternative title: Even very small businesses need accountants

Wow thank you for sharing the story, such a great lesson, it&#x27;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.<p>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&#x27;ll never fly in USA &quot;because freedom!&quot;. I <i>think</i> 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&#x27;s experience feels like it.

This is why platforms like TriNet or EORs like Let&#x27;s Deel have skyrocketed. They deal with some of this stuff for you. Well at least an EOR does...

I own a business and New York is the same way as California, if not worse.

What are the chances OP has a cultural&#x2F;political axe to grind with California, and mistakenly attributes the difficulty of hiring across states to some sort of &quot;general jackassery of California state government&quot;?<p>Context: &quot;The head of the Chicago Republican Party, Chris Cleveland[author&#x2F;OP], has accused the Chicago Board of Elections of &#x27;massive incompetence or massive fraud&#x27;&quot;

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.<p>There is a ton of content on how to code in X language or understanding X technical concept, but I haven&#x27;t discovered too much content on starting a small business in X state.

Thought 1099 workers have to pay both the employer and employee portion of social security?

Yeah, big mistake. I consider California and New York as hostile nations when hiring.

Would this be avoided if the employee was kept on 1099 instead of switching to W-2?

&quot;&quot;&quot; So now they’ve lied to me about my income and demanded information that is none of their business. &quot;&quot;&quot;<p>Ahh, the Muskian, &quot;I couldn&#x27;t possibly be wrong so they are coercing and lying, and I am the victim.&quot;

Wouldn&#x27;t that be avoided by hiring independent contractors?

eh, the consequences guide the compliance<p>I wouldn&#x27;t worry about it, but your counsel or reading comprehension skills might lead you to a different conclusion

One of many reasons I fucking hate California.

“nothing terribly difficult”

Such whining. He had a business in California, but was a remote boss.

tl;dr: stick to contractors, don&#x27;t form employment relationships<p>It doesn&#x27;t make sense anymore<p>baby boomers: get a job and be set for life<p>gen z: change job every 1&#x2F;2 years, all online&#x2F;remote, work from anywhere, move to another country<p>things are moving fast, and regulations are 50 years behind

Dang - LOL at the title change ! Appreciate your constant eye for moderation, that was a juicy one<p>Original title is &quot;Don&#x27;t hire remote employees living in California&quot;