{"id":1689,"date":"2015-05-18T06:44:51","date_gmt":"2015-05-18T06:44:51","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=1689"},"modified":"2017-10-13T11:19:08","modified_gmt":"2017-10-13T18:19:08","slug":"electing-out-of-state-unemployment-insurance","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/electing-out-of-state-unemployment-insurance\/","title":{"rendered":"Avoiding State Payroll Taxes"},"content":{"rendered":"
\"Colorful<\/a>
You’ve got a number of taxes to worry about. Maybe you should opt out of paying state taxes when that’s possible.<\/figcaption><\/figure>\n

The trick to keeping your payroll processing quick and simple is to minimize the busy work involved.<\/p>\n

In fact, I think what you do in a single-employee situation is ignore the busy work as you move through the quarter, and then after the quarter end, and only then, you send in payroll forms to the appropriate government agency (like the Internal Revenue Service) that says, \u201cGuys? The first $10,000 of money I paid out to myself was payroll.\u201d<\/p>\n

Note that if you take this route, you do need to send in a check with the payroll tax forms. If you prepare a 941 that says you\u2019re paying your guy $10,000 a quarter, you send in a check for $1,530 for example. And if you\u2019re saying you pay your guy $16,000 a quarter, you send in a check for $2,248.<\/p>\n

Note: If you\u2019re interested in more information our $20 ebook, \u201cFive Minute Payroll,\u201d\u00a0scroll to the end of this post. Also note that there\u2019s a longer discussion of how the system works here: Quick and Dirty Payroll<\/a>.<\/p>\n

However, while the \u201cFive Minute Payroll\u201d system keeps your federal payroll tax returns simple, you may still have state payroll forms to deal with. Or you will if you\u2019re not careful.<\/p>\n

Accordingly, in this longish blog post, I summarize how you can elect to opt out of paying state payroll taxes for unemployment insurance and workers compensation insurance in a handful of states.<\/p>\n

Note:<\/strong> If you have questions about a state you don\u2019t see listed below, you may want to refer to the National Federation of Independent Business\u2019s website that summarizes the rules by state for workers compensation: http:\/\/www.nfib.com\/article\/workers-compensation-laws-state-by-state-comparison-57181\/<\/a><\/p>\n

And One Quick Upfront Caution<\/h2>\n

One other point: Typically, you\u2019re opting out of one or two taxes: State unemployment taxes and workers compensation insurance.<\/p>\n

But there\u2019s a trade-off here.<\/p>\n

Opting out definitely<\/em> saves you from paying these taxes.<\/p>\n

But opting out often also means you will not get unemployment benefits if you decide to \u201clay yourself off.\u201d It also means that if you got hurt in your business, then you would not be able to get workers compensation benefits.<\/p>\n

I think this trade off is worth it in most single-employee situations.<\/p>\n

In other words, saving both the state payroll taxes (which is nice) and then also making your payroll processing so simple that your payroll work takes five minutes a year (which is nice) more than compensate for the loss of potential unemployment benefits or workers compensation benefits. But do make this determination for yourself.<\/p>\n

And let me make one other tangential remark about this subject. States that make corporations pay unemployment insurance on their officers usually (always?) make it difficult for those officers to obtain unemployment benefits. California, for example, makes unemployed corporate officers jump through hoops to get benefits. Michigan, as another example, limits unemployment benefits available to corporate officers and their families. New Jersey says you can\u2019t be unemployed from a corporation if you owe five percent or more of a corporation\u2014even if you in fact have been laid off.<\/p>\n

And now on to the states that allow you to elect out of state unemployment taxes for single employee situations.<\/p>\n

Alaska<\/h2>\n

While Alaska requires small businesses with even a single employee to provide workers compensation insurance (except in special cases where an employer is an approved self-insurer), Alaska allows small business corporations to exclude corporate officers from unemployment insurance. Refer to this PDF for more information: http:\/\/labor.alaska.gov\/estax\/forms\/taxbook.pdf<\/a>.<\/p>\n

California<\/h2>\n

California requires small business corporations to provide worker compensation insurance, to cover their corporate officers with unemployment insurance, and to pay the employment training tax. However,\u00a0California will allow such corporations to exclude a person who is a corporate officer and the sole shareholder from state disability insurance, including paid family leave. You use this form: http:\/\/www.edd.ca.gov\/pdf_pub_ctr\/de459.pdf<\/a><\/p>\n

Colorado<\/h2>\n

Colorado small corporations do need to pay unemployment insurance premiums for corporate officers, but may reject workers compensation coverage for them by preparing and then filing this form: https:\/\/www.colorado.gov\/pacific\/sites\/default\/files\/WC043_Rejection_of_Coverage_Corporate.pdf<\/a><\/p>\n

Hawaii<\/h2>\n

Small family-owned corporations can elect to exclude family members from unemployment insurance, though not workers compensation insurance, if the family owns at least 50 percent of the corporation. You use this form to make this election: http:\/\/labor.hawaii.gov\/ui\/files\/2012\/12\/UI-UC-336_3-14-07.pdf<\/a><\/p>\n

Idaho<\/h2>\n

Idaho corporations \u00a0are required to provide workers compensation insurance, but can make an election to exempt specific corporate officers from unemployment insurance by using this form: http:\/\/labor.idaho.gov\/publications\/corporateofficer-private.doc<\/a><\/p>\n

Minnesota<\/h2>\n

Corporate officers who own more than 25 percent of a corporation are not subject to Minnesota unemployment insurance. Wages paid\u00a0to LLC members who own\u00a0more than 25 percent of an LLC are similarly not subject to unemployment insurance. Click here for more details: http:\/\/www.uimn.org\/uimn\/employers\/wages-taxes\/owner-officer\/<\/a>. <\/strong>Note that Minnesota small business corporations are required to provide workers compensation insurance to all employees, however.<\/p>\n

Nebraska<\/h2>\n

Nebraska doesn\u2019t allow small business corporations to exclude corporate officers (like the owner or owners) from unemployment insurance. However, corporate officers who own 25 percent of the corporation are not covered by workers compensation insurance unless they elect to be covered by filing a written election with the worker\u2019s compensation insurer and their corporate secretary.<\/p>\n

North Dakota<\/h2>\n

North Dakota treats corporate officers (and also often LLC managers) as employees subject to unemployment insurance and workers compensation insurance. However, a corporation or LLC may elect to exclude corporate officers and LLC managers from unemployment insurance coverage by filing this application at the beginning of the year: http:\/\/www.jobsnd.com\/sites\/default\/files\/Application%20to%20Exempt%20Corporate%20Officers%20from%20Unemployment%20Insurance%20Coverage_1.pdf<\/a><\/p>\n

Oklahoma<\/h2>\n

Oklahoma makes small business corporations (such as those with a single shareholder-employee) pay unemployment insurance, but exempts shareholder-employees from workers compensation coverage if the person owns at least ten percent of the stock.<\/p>\n

Oregon<\/h2>\n

Closely-held family corporations may apply to exclude corporate officers from Oregon unemployment insurance if the corporate officers are directors, shareholders or family members with they have \u201csubstantial ownership\u201d of shares in the corporation. Substantial ownership requires the extended family own at least 75\u00a0percent\u00a0of the stock. See this link for more details: http:\/\/www.oregon.gov\/EMPLOY\/Documents\/uipub208.pdf<\/a> and note that the form you use to apply is: http:\/\/www.oregon.gov\/EMPLOY\/Documents\/form2578.pdf<\/a><\/p>\n

Pennsylvania<\/h2>\n

Pennsylvania requires small business corporations to pay unemployment insurance, but does allow small business corporations to exclude officer-shareholders from workers compensation insurance. To obtain exclusion, the corporation files forms LIBC-509 and LIBC-513 with either the insurance company providing the workers compensation insurance or with the Compliance Section, Bureau of Workers Compensation.<\/p>\n

South Carolina<\/h2>\n

Starting in 2015, corporate officers who \u201cactively\u201d provide services are exempt from unemployment insurance unless the employing corporation elects to cover them. For more information, you can refer here: http:\/\/dew.sc.gov\/corpofficers\/Corporate_Officers_Exemption_FAQ.pdf<\/a><\/p>\n

Washington<\/h2>\n

Corporate officers are automatically exempt from unemployment insurance in Washington State since December 29, 2013. You can get more information here: https:\/\/esd.wa.gov\/employer-taxes\/corporate-officers-FAQ<\/a>.<\/p>\n

Wisconsin<\/h2>\n

Wisconsin small businesses with fewer than three employees are exempted<\/del>\u00a0are generally exempt from providing workers compensation insurance (EDIT: see here for more detail: http:\/\/dwd.wisconsin.gov\/dwd\/publications\/wc\/WKC_13328_P.pdf<\/a>). Further, a Wisconsin corporate may elect to exclude corporate officers from Wisconsin unemployment insurance coverage starting in 2015 if the corporation\u2019s total payroll subject to unemployment insurance is $500,000 or less, if the election covers all principal officers who own 2 percent or more of the corporation. For more information, you can read this PDF: http:\/\/dwd.wisconsin.gov\/dwd\/forms\/ui\/pdf\/uct_8055_e.pdf<\/a><\/p>\n

Wyoming<\/h2>\n

By default, Wyoming corporation officers aren\u2019t subject to unemployment insurance taxes nor to workers compensation taxes. A corporation may, however, elect to provide coverage. Refer to the http:\/\/wyomingworkforce.org\/employers-and-businesses\/Pages\/default.aspx<\/a> for more information about either election.<\/p>\n

And a final caution: State unemployment insurance and workers compensation laws change regularly. Use the preceding paragraphs as a place simply to start your research. You will want to follow that with a quick call to your state\u2019s unemployment insurance office and then to your state\u2019s workers compensation insurance office will give you up-to-date information.<\/p>\n

Five Minute Payroll System: Save Money and Time with this $20 ebook<\/h2>\n
\"Cover<\/a>
Single employee corporations can often take an ad hoc approach to payroll accounting.<\/figcaption><\/figure>\n

Small business payroll amounts to a continuous low-grade headache for one-employee businesses. The payroll laws assume not only that your business employs a healthy number of employees, but that you\u2019ve got a payroll department all too happy to prepare and file another form or two each quarter.<\/p>\n

Accordingly, you want to look for every opportunity simplify and economize.<\/p>\n

One good option is to outsource your payroll to a payroll service like ADP, Paychex, or Zen Payroll. But even the most economical of these (probably Zen Payroll, which costs about $30 a month or roughly $400 a year at the time I\u2019m writing this) adds up. Especially when you consider that these fees are not a one-time outlay, but will go on as long as you run your own corporation.<\/p>\n

Accordingly, we\u2019ve created an alternative, simple approach as discussed in some detail at our Quick and Dirty Payroll blog post and as documented in detail in our $20 ebook, “Five Minute Payroll.” Basically, our suggestion is that you don\u2019t worry about weekly or monthly payroll, but instead get to the end of the quarter and then file forms with the IRS and other relevant state agencies that say the first $10,000 or $16,000 of money you\u2019ve paid to the shareholder-employee represents wages.<\/p>\n

This approach lets you comply with the laws\u2014and means that you shouldn\u2019t spend any more than a few minutes a quarter filing the 941 form and (if required) the equivalent state forms. If you’re interested in buying this $20 ebook, you can\u00a0this button:<\/p>\n