AB1443 - Personal income taxes: unemployment insurance: tips.

CALIFORNIA LEGISLATURE— 2025–2026 REGULAR SESSION Assembly Bill No. 1443 Introduced by Assembly Member Castillo February 21, 2025 An act to amend Sections 17215.1, 17551, 18631, 18663, and 19183 of, to add Section 17132.6 to, and to add and repeal Section 17131.18.5 of, the Revenue and Taxation Code, and to amend, repeal, and add Sections 940, 13009, and 13009.5 of, and to repeal and add Sections 927, 987.7, 13027, and 13055 of, the Unemployment Insurance Code, relating to taxation. LEGISLATIVE COUNSEL'S DIGEST AB 1443, as introduced, Castillo. Personal income taxes: unemployment insurance: tips. The Personal Income Tax Law, in modified conformity with federal law, provides various exclusions from gross income in computing tax liability. Existing law requires employers to make specified payments and withholdings from wages paid for employment to, and to file reports of wages and make contributions for unemployment insurance and the employment training tax with, the Employment Development Department. The department is charged with administering the state’s payroll taxes. This bill, for taxable years beginning on or after January 1, 2026, and before January 1, 2031, would exclude tips, as defined, from gross income for the purposes of the Personal Income Tax Law. The bill, on and after January 1, 2026, and until January 1, 2031, would also exclude tips from the definition of wages paid for employment for purposes of income tax withholding and for purposes of unemployment insurance and the employment training tax. This bill would also make related changes to other provisions. Existing law requires any bill authorizing a new tax expenditure to contain, among other things, specific goals that the tax expenditure will achieve, detailed performance indicators, and data collection requirements. This bill would include additional information required for any bill authorizing a new tax expenditure. Digest Key Vote: MAJORITY Appropriation: NO Fiscal Committee: YES Local Program: NO Bill Text The people of the State of California do enact as follows: SECTION 1. Section 17131.18.5 is added to the Revenue and Taxation Code, to read: 17131.18.5. (a) For taxable years beginning on or after January 1, 2026, gross income does not include tips. (b) For purposes of this section, “tips” includes any gratuity provided by a customer or client of the employer’s business. (c) (1) For purposes of complying with Section 41, the Legislature finds and declares as follows: (A) The goal of the exclusion provided by this section is to assist individuals with retaining more of their earnings. (B) The performance indicators for the Legislature to use in determining whether the exclusion achieves its goal shall be the number of returns claiming the exemption. (2) (A) The Franchise Tax Board, no later than December 1, 2036, shall provide a report to the Legislature, in compliance with Section 9795 of the Government Code, detailing, to the extent data is available, the number of returns claiming the exemption. (B) The disclosure provisions of this paragraph shall be treated as an exception to Section 19542. (C) The requirement for submitting a report imposed under subparagraph (A) shall become inoperative on December 1, 2040, pursuant to Section 10231.5 of the Government Code. (d) This section shall remain in effect only until January 1, 2031, and as of that date is repealed, unless a later enacted statute that is enacted before January 1, 2031, deletes or extends that date. SEC. 2. Section 17132.6 is added to the Revenue and Taxation Code, to read: 17132.6. For taxable years beginning on or after January 1, 2026, and before January 1, 2031, Section 102(a) of the Internal Revenue Code is modified to treat tips as property transferred by gift. SEC. 3. Section 17215.1 of the Revenue and Taxation Code is amended to read: 17215.1. (a) Section 220(f)(5) of the Internal Revenue Code, relating to rollover contributions, shall not apply. (b) For taxable years beginning on or after January 1, 2026, and before January 1, 2031, Section 220(b)(4)(A) of the Internal Revenue Code is modified to strike out “tips.” SEC. 4. Section 17551 of the Revenue and Taxation Code is amended to read: 17551. (a) Subchapter E of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to accounting periods and methods of accounting, shall apply, except as otherwise provided. (b) Section 444(c)(1) of the Internal Revenue Code, relating to effect of election, shall not apply. (c) (1) Notwithstanding the specified date contained in paragraph (1) of subdivision (a) of Section 17024.5, Section 457 of the Internal Revenue Code, relating to deferred compensation plans of state and local governments and tax-exempt organizations, shall apply, except as otherwise provided, without regard to taxable year to the same extent as applicable for federal income tax purposes. (2) The maximum deferred compensation for the taxable year that may be excluded from gross income under Section 457 of the Internal Revenue Code, as applicable for state purposes, shall not exceed the amount of deferred compensation that may be excluded from gross income under Section 457 of the Internal Revenue Code, as in effect on January 1, 2010, including additional elective deferrals under Section 414(v) of the Internal Revenue Code, as in effect on January 1, 2010. (d) (1) For taxable years beginning on or after January 1, 2002, the basis of any person in the plan shall be increased by the amount of compensation not allowed to be excluded under subdivision (a). (2) Any basis described in paragraph (1) shall be recovered in the manner specified in Section 17085. (e) Notwithstanding the limitations provided in subdivision (a), any income attributable to compensation deferred in a plan in taxable years beginning on or after January 1, 2002, in conformance with Section 457 of the Internal Revenue Code, as applicable for federal and state purposes, shall not be includable in the gross income of the individual for whose benefit the plan was established until distributed pursuant to the provisions of the plan or by operation of law. (f) (1) Section 451(i) of the Internal Revenue Code, relating to special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy, shall not apply. (2) For taxable years beginning on or after January 1, 2026, and before January 1, 2031, Section 451(e) of the Internal Revenue Code, relating to special rule for employee tips, shall not apply. (g) Section 457A of the Internal Revenue Code, relating to nonqualified deferred compensation from certain tax indifferent parties, shall not apply. SEC. 5. Section 18631 of the Revenue and Taxation Code is amended to read: 18631. (a) This article does not apply to any payment of interest obligations not taxable under Part 10 (commencing with Section 17001) or Part 11 (commencing with Section 23001). (b) Except as otherwise provided, every person required to file an information return with the Secretary of the Treasury under any of the federal sections listed in subdivision (c) may be required to file a copy of the federal information return with the Franchise Tax Board at the time and in the manner as it may, by forms and instructions, require. (c) Subdivision (b) shall apply to each of the following: (1) Section 6034A of the Internal Revenue Code, relating to information to beneficiaries of estates and trusts. (2) Section 6039 of the Internal Revenue Code, relating to returns required in connection with certain options. (3) Section 6039C of the Internal Revenue Code, relating to returns with respect to foreign persons holding direct investments in United States real property interests, if that person holds a direct investment in a California real property as defined in Section 18662. (4) Section 6041 of the Internal Revenue Code, relating to information at source. (5) Section 6041A of the Internal Revenue Code, relating to returns regarding payments of remuneration for services and direct sales, except that no return or statement shall be required with respect to direct sales pursuant to Section 6041A(b) of the Internal Revenue Code. (6) Section 6042 of the Internal Revenue Code, relating to returns regarding payments of dividends and corporate earnings and profits. (7) Section 6045 of the Internal Revenue Code, relating to returns of brokers. (8) Section 6049 of the Internal Revenue Code, relating to returns regarding payments of interest. (9) Section 6050H of the Internal Revenue Code, relating to returns relating to mortgage interest received in trade or business from individuals. (10) (A) Section 6050I of the Internal Revenue Code, relating to returns relating to cash received in trade or business, etc., except that Section 6050I(g) of the Internal Revenue Code, relating to cash received by criminal court, shall not apply. (B) (i) The Attorney General shall, upon court order following a showing ex parte to a magistrate of an articulable suspicion that an individual or entity has committed a felony offense to which a federal information return is related, be provided a copy of a federal information return filed with the Franchise Tax Board under this paragraph. The Attorney General may make a return or information therefrom available to a district attorney subject to regulations promulgated by the Attorney General. The regulations shall require the district attorney seeking the return or information to specify in writing the specific reasons for believing that a felony offense has been committed to which the return or information is related. (ii) Any information or return obtained by the Attorney General or a district attorney pursuant to this subparagraph shall be confidential and used only for investigative or prosecutorial purposes. (11) Section 6050J of the Internal Revenue Code, relating to returns relating to foreclosures and abandonments of security. (12) (A) Section 6050K of the Internal Revenue Code, relating to returns relating to exchanges of certain partnership interests. (B) In addition to the general requirement under subparagraph (A), a transferor of a partnership interest shall be required to notify the partnership of that exchange in accordance with Section 6050K(c) of the Internal Revenue Code. (13) Section 6050L of the Internal Revenue Code, relating to returns relating to certain donated property. (14) Section 6050N of the Internal Revenue Code, relating to returns regarding payments of royalties. (15) Section 6050P of the Internal Revenue Code, relating to returns relating to the cancellation of indebtedness by certain entities. (16) Section 6050Q of the Internal Revenue Code, relating to certain long-term care benefits. (17) Section 6050R of the Internal Revenue Code, relating to returns relating to certain purchases of fish. (18) Section 6050S of the Internal Revenue Code, relating to returns relating to higher education tuition and related expenses. (19) Section 6052 of the Internal Revenue Code, relating to returns regarding payment of wages in the form of group-term life insurance. (20) Section 6034(a) of the Internal Revenue Code, relating to returns of split-interest trusts. (21) Section 6039I of the Internal Revenue Code, relating to returns and records with respect to employer-owned life insurance contracts. (22) Section 6039J of the Internal Revenue Code, relating to information reporting with respect to commodity credit corporation transactions. (23) Section 6050V of the Internal Revenue Code, relating to returns relating to applicable insurance contracts in which certain exempt organizations hold interests. (24) Section 6050W of the Internal Revenue Code, relating to returns relating to payments made in settlement of payment card and third party network transactions. (25) Any information return that is required to be filed with the Secretary of the Treasury pursuant to a provision of Part III of Subchapter A of Chapter 61 of Subtitle F (commencing with Section 6031) of the Internal Revenue Code that is added to the Internal Revenue Code by a public law enacted on or after January 1, 2009. (d) Every person required to make a return under subdivision (b) shall also furnish a statement to each person whose name is required to be set forth in the return, as required to do so by the Internal Revenue Code. (e) For taxable years beginning on or after January 1, 2026, and before January 1, 2031, Section 6041(e) of the Internal Revenue Code shall not apply. SEC. 6. Section 18663 of the Revenue and Taxation Code is amended to read: 18663. (a) (1) The Franchise Tax Board shall annually (or more often if necessary) prepare and make available to the Employment Development Department, wage withholding tables that shall be used by every employer making payment of any wages to a resident employee for services performed either within or without this state; or to a nonresident employee for services performed in this state, to deduct and withhold from those wages for each payroll period, a tax computed in a manner as to produce, so far as practicable, with due regard to the credits for personal exemptions allowable under Section 17054, a sum that is substantially equivalent to the amount of tax reasonably estimated to be due under Part 10 (commencing with Section 17001) resulting from the inclusion in the gross income of the employee the wages which that were subject to withholding. (2) For wages paid on or after November 1, 2009, wage withholding tables prepared by the Franchise Tax Board pursuant to this subdivision shall produce, so far as practicable, with due regard to the credits for personal exemptions allowable under Section 17054, a sum that will significantly prevent underwithholding by using an amount equal to 10 percent more than the sum described in paragraph (1). (b) (1) (A) For supplemental wages paid on or after January 1, 1992, the rate of withholding that may be applied to supplemental wages in lieu of the wage withholding tables specified in subdivision (a) shall be 6 percent. (B) For supplemental wages paid on or after November 1, 2009, the rate of withholding shall be 6.6 percent. (2) For purposes of this subdivision: (2) For purposes of this subdivision, “supplemental (A) “Supplemental wages” includes, but is not limited to, bonus payments, overtime payments, commissions, sales awards, back pay including retroactive wage increases, and reimbursements for nondeductible moving expenses that are paid for the same or a different period, or without regard to a particular period. (B) (i) For taxable years beginning on or after January 1, 2026, and before January 1, 2031, “supplemental wages” does not include tips. (ii) For purposes of this subparagraph, “tips” means any gratuity provided by a customer or client of the employer’s business. (c) (1) For stock options and bonus payments that constitute wages paid on or after January 1, 2002, the rate of withho [Text truncated for display. Full text available on Congress.gov.]