Author: Phillip Zagotti

California Will Tax SaaS on January 1, 2027: What SB 122 Means for Software Sellers and the Businesses That Buy Software

For decades, California taxed software only when it came in a box. A program on a disk was taxable, while software that was downloaded or run in a browser generally escaped the tax. That ends on January 1, 2027. SB 122, a tax budget trailer bill signed on June 29, 2026 as Chapter 23 of the Statutes of 2026, adds “digital products” to the definition of tangible personal property, which pulls software as a service, downloaded software, and most remotely accessed prewritten software into the sales and use tax. Colorado reportedly passed a similar law weeks earlier with the same effective date. For software sellers in Sacramento and for every Inland Empire business that pays monthly subscriptions, the next four months are the planning window.

What does SB 122 make taxable?

The bill amends Revenue and Taxation Code § 6016 so tangible personal property includes a digital product, and new § 6016.1 defines a digital product as prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely. Software first developed for one customer becomes “prewritten” once it’s held for general sale. The definition then carves out several categories: digital assets, audio and audiovisual works, books, video games, visual works, and “digital infrastructure,” meaning cloud services that let a customer create, deploy, scale, or run its own software. That last exclusion is how the bill treats most infrastructure-as-a-service and platform-as-a-service offerings.

Local and district taxes follow the state tax. The bill amends the Bradley-Burns and district tax statutes so remote sales of digital products are sourced to the purchaser’s address, which means the rate depends on where the customer is, not where the seller is. You can read the full text on the Legislature’s bill page for SB 122.

What stays exempt?

Software built to one customer’s order is still treated as exempt custom software. New § 6372 exempts products bought only for use in other states or in interstate or foreign commerce; the seller carries the burden of proof unless it takes an exemption certificate from the buyer. A buyer with users both inside and outside the state can issue a certificate and self-report use tax on the California portion, though the statute doesn’t say how to split it.

The most debated provision is new § 6372.1, the “human effort” exemption. It covers a digital product that represents a service delivered electronically, where the service primarily involves human effort by the provider and that effort begins after the customer asks for it. The same section says the exemption doesn’t apply to the right to use or access the provider’s software running on cloud infrastructure, whether through a web browser or a program interface. At its July 21, 2026 workshop, the California Department of Tax and Fee Administration reportedly framed the question as one of the “true object” of the transaction and acknowledged it hadn’t yet defined how much human effort is enough. A medical billing firm whose coders work claims and report through a portal has a plausible argument. A practice-management platform the client logs into and runs itself doesn’t.

Transaction after January 1, 2027	California sales or use tax?	Where it comes from
SaaS subscription to prewritten software used in California	Taxable	RTC §§ 6016, 6016.1
Downloaded prewritten software	Taxable	RTC § 6016.1
Custom software written for one customer	Exempt	RTC § 6010.9
Cloud infrastructure a customer uses to run its own software (IaaS, PaaS)	Excluded as digital infrastructure	RTC § 6016.1
Service performed mainly by people and delivered electronically after a request	Possibly exempt; guidance pending	RTC § 6372.1
Software purchased solely for use outside California, with certificate	Exempt	RTC § 6372
E-books, streaming audio or video, video games	Excluded from “digital product”	RTC § 6016.1

Who has to collect the tax, and when does a buyer pay it directly?

An out-of-state seller must register and collect once its California sales exceed $500,000 in the current or preceding year under § 6203(c)(4). A California-based seller needs a seller’s permit regardless. Whether 2026 subscription revenue, which isn’t taxable yet, counts toward the 2027 threshold is one of many questions CDTFA hasn’t answered.

SB 122 also flips collection responsibility for very large buyers. Under new §§ 6052 and 6201.55, once a single customer’s annual digital product purchases from a single vendor top $5 million, the customer rather than the vendor self-assesses and pays the tax directly to CDTFA. Starting in 2028, the prior year’s purchases also count. That rule will mostly affect large employers and hospital systems, but mid-market buyers of enterprise software should track it.

The more common exposure is use tax on vendors that never register. Under § 6202, a California purchaser owes use tax when the seller doesn’t collect it. And through 2028, § 6225 requires a business that isn’t otherwise registered with CDTFA to register as a qualified purchaser and file by April 15 once it has more than $10,000 of purchases subject to use tax. Many small professional firms in Riverside and San Bernardino counties have never registered, because they’ve never bought much taxable equipment from out of state. A few software subscriptions from small vendors could change that.

What will this cost a Temecula business or a Sacramento software company?

Start with a Temecula medical billing company that spends $180,000 a year on SaaS. Temecula’s combined rate is 8.75%, according to CDTFA’s April 2026 rate schedule, so if every vendor collects, the company pays $15,750 a year in new tax. If a fifth of its seats are used by remote billers in Arizona and it gives vendors an out-of-state use certificate while self-reporting the California share, the tax on the remaining $144,000 is $12,600, though that split is exactly the kind of allocation CDTFA hasn’t blessed yet. If $60,000 of its software comes from small out-of-state vendors that don’t register, it owes $5,250 of use tax itself, and because those untaxed purchases exceed $10,000, it has to register and file a qualified purchaser return. The tax is a deductible business expense for income tax purposes, which softens the cost but doesn’t eliminate it.

Now take a Sacramento startup selling $2 million of subscriptions a year, 40% to California customers. At an 8.75% rate across its California customers, that’s $70,000 of tax, and the actual figure depends on each customer’s address. Who bears it depends on the contract. Civil Code § 1656.1 makes a seller’s right to add sales tax reimbursement depend on the terms of the sale. If the company’s master agreements state tax-included prices, about $64,400 of the $800,000 is tax that comes out of revenue. If they say nothing about tax, the company owes tax on the full $800,000 and may be unable to pass the $70,000 through. On the income tax side, the same California customers already drive its Franchise Tax Board sales factor under market-based sourcing, so the company will now report the same revenue to two state agencies.

What happens to contracts that run past January 1, 2027?

SB 122 contains no transition rule for existing contracts and no rule for bundled software and services. At the July workshop, CDTFA reportedly said a taxable sale requires a right to use the software and consideration after the effective date, and it didn’t commit to whether the contract date or the payment date controls a multiyear deal. That makes year-end prepayments risky. An annual subscription invoiced and paid in December 2026 for calendar 2027 service may still be taxed, and a company that prepays three years to “beat the tax” could find it bought nothing but an audit issue. CDTFA has reportedly circulated draft emergency regulations for discussion and expects to adopt rules before the effective date, so businesses should watch its special notices page.

Until the regulations arrive, there’s still plenty to do. Sellers should update contract templates to state that prices exclude tax and that the customer reimburses applicable tax, separate human-effort services and infrastructure from software access on invoices, and start collecting reliable billing and service addresses for every customer now. Buyers should list every software vendor, flag which ones are likely to collect, and budget the tax at their local rate. Businesses with teams outside California should decide how they’ll document out-of-state use before signing their 2027 renewals.

How did California treat software before, and why does it matter now?

Under Cal. Code Regs., tit. 18, Regulation 1502(f), prewritten software delivered by remote telecommunication without any tangible property changing hands wasn’t taxable. Sellers also relied on the technology transfer agreement rules; in Nortel Networks Inc. v. State Board of Equalization (2011) 191 Cal.App.4th 1259, the Court of Appeal held that the value of copyright and patent interests transferred in certain software licenses wasn’t subject to sales tax. SB 122’s amended definition expressly includes “any copyright or patent interests associated” with a digital product, which reads like a response to that line of argument. Anyone with an open refund claim or audit involving pre-2027 software transactions should keep those older rules in view, because the new law is prospective.

Frequently Asked Questions

Is SaaS taxable in California?

Starting January 1, 2027, yes. SB 122 treats prewritten software accessed remotely as a taxable digital product, subject to state and local sales or use tax at the customer’s location.

Is cloud hosting or infrastructure taxable under SB 122?

Services that let a customer create, deploy, scale, or run its own software are excluded as “digital infrastructure,” which generally covers IaaS and PaaS. Bundled offerings may need allocation.

What is the human effort exemption?

It exempts services delivered electronically that primarily involve the provider’s human effort, performed after the customer’s request. It doesn’t cover access to the provider’s software, and CDTFA hasn’t yet defined how much human effort is required.

Do I owe use tax if my software vendor doesn’t charge California tax?

Yes. The purchaser owes use tax when the seller doesn’t collect it, and through 2028 a business with more than $10,000 of such purchases must register with CDTFA as a qualified purchaser.

Will prepaying a 2027 subscription in 2026 avoid the tax?

Not reliably. SB 122 has no transition rule, CDTFA has reportedly tied taxability to use rights and consideration after January 1, 2027, and it hasn’t said whether the contract date or the payment date controls.

Which rate applies to a SaaS subscription?

The combined state and local rate at the purchaser’s address in the seller’s records. For example, CDTFA lists 8.75% for Riverside, Temecula, Ontario, and Sacramento as of April 2026.

How North Star Law Firm Can Help

North Star Law Firm helps California businesses and software companies prepare for SB 122, including taxability reviews, contract tax clauses, qualified purchaser registration, and CDTFA audits and appeals. Phillip Zagotti is a California attorney and a CPA, so a sales tax review can cover the contract language, the invoice structure, and the income tax sourcing together. Learn more about the firm’s sales and payroll tax practice, its tax defense work, and its contract drafting and review, or schedule a consultation to plan for your 2027 renewals.

September 8, 2026

Multiemployer Pension Withdrawal Liability After City of Tacoma: Deadlines, the Interest Rate Fight, Business Sales, and Bankruptcy for California Employers

Few letters surprise a California business owner like a withdrawal liability demand. A concrete contractor in Riverside, a grocery distributor in San Bernardino, or a trucking company in Fontana decides to stop contributing to a union pension plan, whether by closing a yard, selling assets, or letting a contract lapse, and months later the plan’s actuary sends a bill for the company’s share of the plan’s unfunded vested benefits. The number is often seven figures. On August 10, 2026, the Ninth Circuit affirmed a ruling that cut one of those bills by roughly $30 million, and the case shows both how much the actuary’s assumptions matter and how unforgiving the statute’s deadlines are.

What did the Ninth Circuit decide in City of Tacoma?

The City of Tacoma withdrew from the Western Metal Industry Pension Fund, and in November 2021 the fund demanded $44,325,881. Its actuary had discounted the fund’s future benefit obligations using the Pension Benefit Guaranty Corporation’s annuity purchase rates of 2.84% and 2.53%, even though the same fund assumed a 7% return when setting contributions for employers who stayed. A lower discount rate makes the present value of future benefits larger, so the choice multiplied the city’s bill. An arbitrator found the PBGC rates improper and ordered a recalculation at 7%, and the district court affirmed, noting the rate choice had increased the assessment by about $30 million.

In an unpublished memorandum, City of Tacoma v. Western Metal Industry Pension Fund, No. 25-4055 (9th Cir. Aug. 10, 2026), the court agreed that the PBGC rates didn’t reflect the plan’s own assets or expected experience, as ERISA requires. It followed its published decision in GCIU-Employer Retirement Fund v. MNG Enterprises, Inc., 51 F.4th 1092 (9th Cir. 2022), which arose from the Central District of California. Rather than sending the question back to the actuary, the panel upheld the order to use the 7% funding rate, because the fund’s own actuary had described that rate as based on expected returns. It denied Tacoma’s request for attorney’s fees, citing the fund’s ability to pay and the effect on participants. The city won, but only after years of arbitration and federal court review.

Why is the interest rate the whole fight?

Because the unfunded vested benefits calculation is a present value, and small changes in the discount rate move it enormously. 29 U.S.C. § 1393(a) requires withdrawal liability assumptions that, taken together, offer the actuary’s best estimate of anticipated experience under the plan. The Sixth Circuit in Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, 15 F.4th 407 (6th Cir. 2021), and the D.C. Circuit in United Mine Workers of America 1974 Pension Plan v. Energy West Mining Co., 39 F.4th 730 (D.C. Cir. 2022), reached similar conclusions about rates untethered to the plan’s investments.

Two developments could shift the ground. In M & K Employee Solutions, LLC v. Trustees of the IAM National Pension Fund, decided May 21, 2026, the Supreme Court held that assumptions adopted after the measurement date can be used, while leaving other questions open. And the PBGC has a 2022 proposed rule that would let plans pick any rate from the PBGC’s own rates to the funding rate, including blends. The federal regulatory agenda targets a final rule for November 2026. If it’s adopted as proposed, arguments like Tacoma’s would get harder. Plans that received Special Financial Assistance under the American Rescue Plan are a separate category: 29 C.F.R. § 4262.16(g) requires them to use PBGC rates for years, so the Tacoma argument generally won’t help an employer leaving one of those plans.

What deadlines apply after a demand letter arrives?

This is where employers lose cases they could have won. Under § 1399(b)(2), the employer has 90 days after receiving the demand to ask the plan to review it. Payments still start within 60 days of the demand, regardless of any review request, under the “pay now, dispute later” rule in § 1399(c)(2). Arbitration must be initiated within 60 days after the earlier of the plan’s response to the review request or 120 days after the request, under § 1401(a)(1). Miss that window and the amount becomes due and owing, with no chance to challenge the actuary’s rate. Miss a payment and, 60 days after written notice, the plan can accelerate the entire balance and sue for interest, liquidated damages equal to the greater of interest or 20%, and attorney’s fees.

Received a withdrawal liability demand or a notice of partial withdrawal? The 90-day review window and the arbitration deadline can’t be recovered once they pass. Have the assessment reviewed while every defense is still available.

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Event (demand received Monday, October 5, 2026)	Deadline	Authority
First installment due	Friday, December 4, 2026	29 U.S.C. § 1399(c)(2)
Last day to request plan review	Sunday, January 3, 2027 (don’t count on the weekend)	§ 1399(b)(2)(A)
Review request actually sent (assumed)	Tuesday, December 1, 2026
Plan responds (assumed)	Monday, February 15, 2027	§ 1399(b)(2)(B)
Arbitration must be initiated	Friday, April 16, 2027	§ 1401(a)(1)
Court challenge to an arbitration award	30 days after the award	§ 1401(b)(2)

How much can the rate change a small employer’s bill?

Here’s a simplified illustration, not an actuarial calculation. Suppose a Riverside concrete contractor stops contributing but keeps doing nonunion work in the same area, which counts as a complete withdrawal under the construction industry rule in § 1383(b). Assume its allocable share of vested benefits is a stream of $500,000 a year for 25 years, and its share of plan assets is $5 million. Discounted at 7%, those benefits are worth about $5.83 million, leaving withdrawal liability of roughly $827,000. At 2.5%, they’re worth about $9.21 million, and the liability jumps to about $4.21 million, roughly five times as much.

The payment schedule changes the real cost again. The statute sets annual payments from the employer’s historical contributions, say 18,000 hours at a $10 contribution rate, or $180,000 a year, and amortizes the liability at the plan’s funding rate, capped at 20 years of payments under § 1399(c)(1)(B). The $827,000 liability is paid off in about six years, roughly $1.03 million in total. The $4.21 million liability generates more annual interest than the payment covers, so the employer pays the full 20 years, $3.6 million. The rate dispute is worth about $2.57 million in actual cash.

What happens when the business is sold, or files bankruptcy?

A stock sale usually isn’t a withdrawal, because the contributing employer doesn’t change. An asset sale is a withdrawal unless the parties follow § 1384 precisely: the buyer must take on substantially the same contribution obligation, post a bond or escrow for five plan years, and the seller stays secondarily liable if the buyer withdraws during that period. Buyers can inherit liability even outside that section. In Resilient Floor Covering Pension Trust Fund v. Michael’s Floor Covering, Inc., 801 F.3d 1079 (9th Cir. 2015), the court held that a buyer with notice of the liability that continues substantially the same business can be a successor. Any deal that looks designed to dodge the liability can be disregarded under § 1392(c). Our post on California assignments for the benefit of creditors covers related sale structures for distressed companies.

Owners also need to know about controlled group exposure. Under § 1301(b)(1), all trades or businesses under common control are treated as one employer. In Board of Trustees of the Western Conference of Teamsters Pension Trust Fund v. Lafrenz, 837 F.2d 892 (9th Cir. 1988), owners who leased trucks to their own company were running a trade or business and became personally liable. The modern version is the family trust or LLC that owns the yard and leases it to the union contractor. That entity may be swept into the controlled group, and if the leasing activity isn’t run through a separate corporation or LLC, the owners’ personal assets can be at risk. Estate plans and entity structures for these businesses should be reviewed with that rule in mind.

In bankruptcy, liability from a withdrawal before the filing is generally a nonpriority unsecured claim that can be discharged or paid a percentage under a plan, as in Trustees of the Amalgamated Insurance Fund v. McFarlin’s, Inc., 789 F.2d 98 (2d Cir. 1986). The Third Circuit has given administrative priority to the portion tied to work after the petition, and the Ninth Circuit hasn’t decided that question. Controlled group members that don’t file bankruptcy remain fully liable. On the tax side, 26 U.S.C. § 404(g) treats withdrawal liability payments as deductible plan contributions.

Frequently Asked Questions

What is multiemployer pension withdrawal liability?

It’s an employer’s share of a union pension plan’s unfunded vested benefits, assessed when the employer stops contributing in whole or in part. ERISA requires the employer to pay it in installments or a lump sum.

How long do I have to challenge a withdrawal liability assessment?

You have 90 days after receiving the demand to request review, and you must start arbitration within 60 days after the earlier of the plan’s response or 120 days after your request. Missing arbitration makes the amount final.

Do I have to pay while I dispute the assessment?

Yes. Installments begin within 60 days of the demand even if you’ve requested review or started arbitration. Refunds are available if you win.

Are PBGC annuity rates allowed for withdrawal liability in the Ninth Circuit?

Under the Ninth Circuit’s published GCIU decision, followed in the unpublished City of Tacoma memorandum, using PBGC annuity rates that don’t reflect the plan’s expected experience is improper. Plans receiving Special Financial Assistance are required to use PBGC rates for a period of years.

Does selling my company’s assets trigger withdrawal liability?

Generally yes, unless the sale meets § 1384, which requires the buyer to assume substantially the same contribution obligation and post a bond or escrow, with the seller remaining secondarily liable for five years.

Can owners be personally liable for withdrawal liability?

Not usually for a corporation’s liability, but owners can be liable through commonly controlled trades or businesses, such as a sole proprietorship or an unincorporated leasing activity serving the company.

How North Star Law Firm Can Help

North Star Law Firm helps California employers review withdrawal liability demands, meet review and arbitration deadlines, structure business sales around § 1384, and evaluate bankruptcy options when the liability threatens the company. Phillip Zagotti is a California attorney and a CPA, which lets the firm test the actuary’s assumptions and model payment scenarios alongside the legal defenses. Learn more about the firm’s work on buying and selling a business, business sale tax structuring, and Subchapter V reorganization.

September 7, 2026

You Won a Judgment in California and the Defendant Filed Chapter 11: What Van Leeuwen v. Rebel Teaches Judgment Creditors

Winning the trial is the part clients celebrate. Collecting is the part that decides whether the win was worth it. Ice cream maker Van Leeuwen learned that this summer. A federal court in Brooklyn awarded it $23,785,000 of Rebel Creamery’s profits over copycat packaging in Van Leeuwen Ice Cream LLC v. Rebel Creamery LLC, No. 1:21-cv-02356 (E.D.N.Y. July 16, 2026). On August 14, Rebel filed Chapter 11 in Utah, where its schedules reportedly list the judgment as disputed. The case isn’t in California, but the pattern plays out in Riverside Superior Court and the Central District of California all the time: a business wins a judgment, the defendant can’t or won’t bond an appeal, and a bankruptcy petition lands before the first levy. California’s enforcement statutes and the Ninth Circuit’s bankruptcy decisions give creditors here a different set of tools, and a few traps, than creditors in New York or Texas.

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Winning the lawsuit is the part everyone celebrates. Collecting is the part that decides whether the win was worth anything. An ice cream maker learned that this summer. A federal court awarded it twenty-three million seven hundred eighty-five thousand dollars against a competitor over copycat packaging. Four weeks later, the competitor filed Chapter eleven, and its bankruptcy schedules reportedly list that judgment as disputed. The same pattern plays out in California courtrooms all the time. A business wins big, the defendant cannot post an appeal bond, and a bankruptcy petition lands before the first levy. What you do on day one decides how that story ends.

Here is the distinction that controls everything: a judgment by itself is just an unsecured promise to pay. A judgment lien turns it into a claim against specific property. California gives a creditor three cheap tools the day judgment is entered. Recording an abstract of judgment with the county recorder puts a lien on the debtor’s real estate in that county, good for ten years, and renewable. Filing a notice of judgment lien with the Secretary of State reaches a business debtor’s equipment, inventory, and receivables for five years. And serving an order for a debtor examination creates a one-year lien on personal property, while forcing an officer of the company to explain, under oath, where the money is. Meanwhile the judgment grows at ten percent a year in most commercial cases. Every one of those steps starts a clock, and the clock is the whole game.

Why does the clock matter? Because bankruptcy law lets a debtor undo any judgment lien that attached within ninety days before the petition. Picture a winery that wins one point eight million dollars against a competing company and records its abstract two weeks later. The competitor cannot post the roughly two point seven million dollar appeal bond, so it files under Subchapter Vee, the streamlined small business track of Chapter eleven, forty-five days after the lien was recorded. That lien would have secured six hundred thousand dollars of equity in the competitor’s property. Because it attached inside the ninety-day window, the debtor wipes it out, and the winery drops back into the unsecured pool. Had the petition come ninety-one days or later, the winery would hold a secured claim for the full six hundred thousand. Now, one point cuts the other way. If the defendant does manage to bond the appeal, your liens are extinguished, but the bond, typically one and a half times the judgment through an admitted surety, is stronger security than any recorded lien. Creditors rarely object to that trade.

There is a harder truth for California creditors. In this circuit, unlike at least three others, the current appellate guidance says a company in Subchapter Vee can probably discharge even a judgment for willful and malicious conduct, intentional wrongdoing, if it confirms a plan over your objection. The appeals court has not given a final answer, so careful creditors still file a protective complaint, but you do not build a strategy on it. And in the liquidation analysis that sets your minimum recovery, punitive damages rank behind ordinary unsecured claims. In the winery example, the five hundred thousand dollars of exemplary damages would receive nothing, lowering the minimum the plan must pay. The deadlines to object to the debtor’s eligibility, to file your claim, and to challenge discharge all run from the meeting of creditors, and they are short.

So, three things this week. If you hold a judgment against a shaky defendant, create your liens today, record the abstract in every county where the debtor owns real estate, file the notice with the Secretary of State, and calendar the ninety-day mark. If you are still at trial, ask for specific findings that the defendant intended the injury, general punitive damages language may not survive into bankruptcy. And if a defendant has already filed, get your claim on file if the schedules call it disputed, and calendar every deadline from the meeting of creditors. That is what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at C-A dash legal dot net.

What should a California judgment creditor do the day judgment is entered?

Create liens immediately, because the bankruptcy clock runs from the date a lien attaches. An abstract of judgment recorded with the county recorder attaches to real estate the debtor owns or later acquires in that county under Code of Civil Procedure § 697.310, lasting ten years from entry of judgment and renewable. Filing a notice of judgment lien with the Secretary of State under § 697.510 creates a five-year lien on a business debtor’s accounts receivable, equipment, inventory, and certain other personal property located in California. Serving an order for examination under § 708.110 creates a one-year lien on the debtor’s personal property, and it forces the debtor’s officer to explain under oath where the money is. The judgment accrues interest at 10% a year under § 685.010 in most commercial cases, compared with the much lower federal post-judgment rate under 28 U.S.C. § 1961.

Each of those steps is cheap. Every day of delay pushes the 90-day preference window later, and a filing before that window closes can undo the lien.

What happens to those liens if the defendant bonds the appeal instead?

They disappear, but the creditor gets something better. To stay enforcement of a money judgment pending appeal, § 917.1 requires an undertaking of twice the judgment, or one and a half times the judgment if an admitted surety insurer issues it. Under § 697.040, once enforcement is stayed by an undertaking, existing enforcement liens are extinguished and no new ones can be created. A surety bond worth 150% of the judgment is stronger security than a recorded abstract, so creditors rarely object. The practical point is the fork it creates. A defendant that can post a bond usually does. A defendant that can’t often files bankruptcy, and that’s when the age of the creditor’s liens matters most.

Can a bankruptcy filing wipe out a judgment lien?

Yes, if the lien attached within 90 days before the petition. Getting a judicial lien counts as a transfer for an old debt, the debtor is presumed insolvent throughout that period, and 11 U.S.C. § 547 lets the trustee avoid it. In Subchapter V, § 1184 gives the debtor in possession the same power, and the avoided lien is preserved for the estate’s benefit rather than returned to the creditor.

Here’s how that plays out. A Temecula winery wins a $1.8 million judgment under the California Uniform Trade Secrets Act against a competing Riverside County LLC on June 1, 2026: $1 million of actual loss and unjust enrichment, $500,000 of exemplary damages under Civil Code § 3426.3(c), and $300,000 of attorney’s fees. The winery records its abstract on June 15. The competitor can’t post a $2.7 million surety bond and files Subchapter V in the Riverside Division on July 30, 45 days after recording. The competitor’s tasting room parcel is worth $1.5 million with a $900,000 first deed of trust, so the abstract would have secured $600,000 of equity. Because it attached inside the 90-day window, the debtor can avoid it. If the petition had come 91 or more days after recording, the winery would hold a $600,000 secured claim entitled to full value under the plan. With prepetition interest of about $29,100, the winery’s claim is roughly $1,829,000. Add the competitor’s $900,000 bank loan and $250,000 of trade debt, and total debt of about $2.98 million keeps it under the $3,424,000 Subchapter V limit.

Did a defendant you hold a judgment against just file bankruptcy? Proof of claim, eligibility objection, and dischargeability deadlines start running from the meeting of creditors. Get your position mapped out now.

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Can a business in Subchapter V discharge a judgment for intentional misconduct?

In the Ninth Circuit, probably yes, which puts California at odds with the three circuits that have ruled. Under § 1192, a Subchapter V debtor confirmed without creditor consent receives a discharge that excepts debts “of the kind specified in section 523(a),” which includes debts for willful and malicious injury. The Fourth Circuit in In re Cleary Packaging, LLC, 36 F.4th 509 (4th Cir. 2022), the Fifth Circuit in In re GFS Industries, L.L.C., 99 F.4th 223 (5th Cir. 2024), and the Eleventh Circuit in BenShot, LLC v. 2 Monkey Trading, LLC (11th Cir. 2025) all read that exception to cover corporate debtors. The Ninth Circuit Bankruptcy Appellate Panel went the other way in Lafferty v. Off-Spec Solutions, LLC (In re Off-Spec Solutions, LLC), 651 B.R. 862 (9th Cir. BAP 2023), holding that § 523(a) applies only to individuals. The Ninth Circuit Court of Appeals hasn’t ruled, and BAP decisions don’t bind district courts, so a creditor should still file a protective nondischargeability complaint. But a California creditor shouldn’t build its strategy on that complaint.

Even for an individual debtor, a state court judgment only helps as much as its findings. In Plyam v. Precision Development, LLC (In re Plyam), 530 B.R. 456 (9th Cir. BAP 2015), a punitive damages award under Civil Code § 3294 phrased in the alternative, malice, oppression, or fraud, didn’t establish the willfulness required for § 523(a)(6). Trial counsel who expect a collection fight should ask for special findings on intent to injure.

What leverage does the creditor have inside the bankruptcy case?

More than it may seem, starting with the appeal. The automatic stay freezes the debtor’s own appeal of a judgment entered against it. The Ninth Circuit held in Ingersoll-Rand Financial Corp. v. Miller Mining Co., 817 F.2d 1424 (9th Cir. 1987), that the stay covers all appeals in cases originally brought against the debtor, whichever side is appealing. So the debtor needs stay relief to pursue the appeal, and the creditor gets a voice in the timing. Bankruptcy courts in the circuit weigh the factors collected in In re Kronemyer, 405 B.R. 915 (9th Cir. BAP 2009).

Bad faith is another lever, though a narrow one. In re Marsch, 36 F.3d 825 (9th Cir. 1994), upheld dismissal of a Chapter 11 filed to avoid posting an appeal bond by a debtor that could pay the judgment in full. A debtor that genuinely couldn’t bond won’t fit that holding. Creditors can also challenge Subchapter V eligibility within 30 days after the meeting of creditors concludes under Bankruptcy Rule 1020(b), and anyone whose claim is scheduled as disputed must file a proof of claim, because § 1111(a) doesn’t deem those claims filed.

Finally, every plan must pay each dissenting creditor at least what it would receive in a Chapter 7 liquidation. In a Chapter 7, § 726(a)(4) pushes punitive and exemplary damages behind ordinary unsecured claims. If the winery’s opponent would net $830,000 for unsecured creditors in a Chapter 7, the $500,000 exemplary award gets nothing, and after sharing with $250,000 of trade claims, the winery’s floor is about $696,000 on its compensatory award and fees, ignoring interest for simplicity. The Ninth Circuit BAP’s May 2026 decision in Camara v. Matheson Flight Extenders (In re Matheson Flight Extenders, Inc.), arising from a Sacramento-area case, confirms that courts can look behind a settlement to characterize a debt as punitive, but held that the confirmation-stage tools don’t apply after confirmation.

Creditor step	Authority	Timing
Record abstract of judgment in each county with real property	CCP § 697.310	Day of entry; 90-day preference clock starts at recording
File notice of judgment lien with Secretary of State	CCP § 697.510	Day of entry; lasts five years
Serve order for debtor examination	CCP § 708.110	Promptly; creates one-year lien
File proof of claim if scheduled as disputed	11 U.S.C. § 1111(a)	By the claims bar date
Object to Subchapter V designation	Fed. R. Bankr. P. 1020(b)	30 days after the § 341 meeting concludes
File nondischargeability complaint	Fed. R. Bankr. P. 4007(c)	60 days after the first date set for the § 341 meeting

Frequently Asked Questions

Does a bankruptcy filing stop collection of a California judgment?

Yes. The automatic stay halts levies, garnishments, and lien enforcement immediately, and in the Ninth Circuit it also stops the debtor’s own appeal of the judgment until the bankruptcy court grants relief.

Is my judgment lien safe if the debtor files bankruptcy?

A lien that attached more than 90 days before the petition is generally safe as a secured claim to the extent of the property’s value. A lien created within 90 days can usually be avoided as a preference.

What happens to my liens if the defendant posts an appeal bond?

Under Code of Civil Procedure § 697.040, a stay backed by an undertaking extinguishes existing enforcement liens, but the bond itself, typically 150% of the judgment through an admitted surety, becomes your security.

Can a company discharge a willful and malicious injury judgment in Subchapter V?

In the Ninth Circuit, the Bankruptcy Appellate Panel held in Off-Spec that the § 523(a) exceptions don’t apply to corporate debtors, which differs from the Fourth, Fifth, and Eleventh Circuits. The Ninth Circuit hasn’t ruled.

Do I need to file a proof of claim if the debtor listed my judgment?

If the debtor scheduled it as disputed, contingent, or unliquidated, yes. Only undisputed scheduled claims are deemed filed in Chapter 11.

Are punitive damages paid in bankruptcy?

In a Chapter 7, punitive and exemplary damages are paid after ordinary unsecured claims. In Chapter 11, that ranking shapes the minimum a creditor must receive under the best interests test.

How North Star Law Firm Can Help

North Star Law Firm represents judgment creditors, vendors, and business owners in bankruptcy cases in the Central District of California, including Subchapter V eligibility fights, plan objections, lien disputes, and nondischargeability litigation. Phillip Zagotti is a California attorney and a CPA, and in these cases the liquidation analysis and the debtor’s projections often decide the outcome as much as the legal arguments do. See the firm’s Subchapter V practice, its preference and clawback work, and the overview of its bankruptcy services. For a related path distressed companies use to avoid court altogether, read the firm’s post on California assignments for the benefit of creditors.

September 6, 2026

Trump Accounts for California Families: SB 180 Conformity, Gift Tax Safe Harbors, and Who Controls the Money at 18

The first day anyone could put money into a Trump account was July 4, 2026, and grandparents across the Inland Empire are asking the same two questions: should we put money in, and what does California think of it? Until this summer, the second answer was unfriendly. The Franchise Tax Board’s conformity table, last updated in April, said California didn’t follow the federal Trump account rules at all. Then the Legislature passed SB 180, a tax budget trailer bill chaptered on July 13, 2026 as Chapter 85 of the Statutes of 2026, which generally conforms state law to the federal treatment of these accounts for tax years beginning on or after January 1, 2026. That changes the planning math for California families, and it makes the gift tax details and the control-at-18 question more important than the state tax question.

What is a Trump account?

Internal Revenue Code § 530A, added by the 2025 federal tax law, creates a special individual retirement account for a child under 18 who has a Social Security number. Until January 1 of the year the child turns 18, the account can hold only low-cost funds tracking a U.S. equity index, and no distributions are allowed. Regular contributions, from parents, grandparents, friends, and employers combined, are capped at $5,000 per year, a figure indexed for inflation after 2027. Some contributions don’t count against that limit, including the one-time $1,000 federal pilot deposit under § 6434 for U.S. citizen children born from 2025 through 2028, and certain general contributions from governments and charities. Parents claim the pilot deposit by election on IRS Form 4547 or through trumpaccounts.gov.

Contributions aren’t deductible. After-tax contributions from family members create basis, so they come back tax-free, while the pilot deposit, employer contributions, and all of the growth are taxed when withdrawn. Once the growth period ends, the account generally works like a traditional IRA in the child’s name. Employers can contribute up to $2,500 per employee under § 128, and Treasury published proposed rules for those employer programs on August 11, 2026, with comments due September 25.

How does California tax Trump accounts after SB 180?

California doesn’t adopt federal tax changes automatically. Its conformity date under Revenue and Taxation Code § 17024.5 was January 1, 2025, which is why the FTB’s summary of federal changes originally said the state didn’t conform. Without conformity, earnings inside the account could have been taxable to the family every year, the way California still treats health savings accounts. The Assembly Budget Committee’s June 27, 2026 floor report described SB 180 as conforming state law to the favorable federal treatment of these children’s accounts “for ease of taxpayer compliance,” and the enacted bill applies beginning with the 2026 tax year.

For most families, that means the account grows without annual California tax and is taxed on withdrawal, as it is federally. California’s usual additional tax on early retirement account withdrawals is 2.5% under § 17085(c), rather than the federal 10%. Two cautions apply. The FTB hasn’t yet updated its published guidance, and the Employment Development Department hasn’t said how employer contributions should be treated for state wage reporting. Employers setting up contribution programs should confirm their payroll provider’s California treatment before the first deposit.

Do grandparents need to file a gift tax return?

Usually not, if they stay inside the safe harbor in Revenue Procedure 2026-25. A gift to a minor’s account that can’t be touched until 18 would normally be a gift of a future interest, which doesn’t qualify for the annual exclusion. The revenue procedure lets individuals treat cash Trump account contributions as present-interest gifts eligible for the $19,000 annual exclusion for 2026, with no Form 709, but only if several conditions hold. The donor must be an individual, the only taxable gifts must be cash Trump account contributions, the donor’s total gifts to that beneficiary for the year can’t exceed $19,000, no gift or generation-skipping transfer tax can result, and no gift tax return can be required or filed for any other purpose. If the donor goes over the limit or files a 709 anyway, the contributions have to be reported as future-interest gifts.

That last condition creates a trap for families who also fund college savings. A grandparent who “superfunds” a ScholarShare 529 plan by electing to spread a large gift over five years must file a Form 709 in the first year, and when the ratable amount in each later year uses the full $19,000 exclusion, that grandparent’s Trump account contributions fall outside the safe harbor for the rest of the five-year window too. Nothing may be owed, given the $15 million federal exemption, but the reporting obligation returns every year.

California’s community property rules help married grandparents. The Form 709 instructions treat a gift of community property as made half by each spouse, so a Riverside couple can give $38,000 of community funds to one grandchild without the gift-splitting election that would itself require a return.

Who controls the money when the child turns 18?

The child does, and that’s the question families should spend the most time on. Under the proposed regulations Treasury issued in March 2026, the child owns the account, and a “responsible party,” chosen in priority order starting with a legal guardian and then a parent, manages it until the growth period ends. After that, the young adult can withdraw funds, subject to income tax on the taxable portion and federal and California early-withdrawal additional taxes unless an IRA exception like higher education expenses applies. There’s no way to name a trustee to hold the money until age 25 or 30.

California’s Uniform Transfers to Minors Act offers slightly more control, but less than many people assume. A custodian normally transfers the property at 18, and Probate Code § 3920.5 allows a later date. A lifetime gift can be held only until 21, while a transfer under a will or trust can be held until 25. A trust is still the only tool that lets a family decide how long money stays protected, what it can be used for, and who steps in if something goes wrong.

Feature	Trump account	ScholarShare 529	California UTMA account	Irrevocable trust
Who controls at 18	The child	The account owner, often the parent or grandparent	The child at 18, or up to 21 or 25 depending on how funded	The trustee, on the family’s terms
Annual family contribution limit	$5,000 per child	No annual limit, but a maximum account balance; gift tax rules apply	None	None
California tax on growth	Deferred after SB 180	Tax-free for qualified expenses	Taxed yearly, subject to kiddie tax rules	Depends on trust design
Gift tax safe harbor without Form 709	Yes, Rev. Proc. 2026-25, $19,000 limit	Annual exclusion; 5-year election requires 709	Annual exclusion	Generally needs Crummey powers or a 709
Investment choices	Low-cost U.S. equity index funds only	Plan menu	Broad	Broad

What does a sensible plan look like for a Riverside family?

Consider grandparents in Riverside with two grandchildren, one born in March 2025 and one in May 2026. The parents make the pilot elections, so each child receives the $1,000 federal deposit, and neither parent’s employer contributes. In 2026 the grandparents contribute $5,000 of community funds to each child’s Trump account, using that child’s full annual family limit, and put the remaining exclusion, $33,000 per grandchild, into ScholarShare accounts without a five-year election. That’s $76,000 of gifts with no gift tax return.

If they keep contributing $5,000 a year to the younger child’s account through 2043 and the account earns 7% a year (treating each contribution as made at the start of the year for simplicity), it would hold about $185,000 when the growth period ends, on $91,000 of total contributions. The $90,000 the grandparents put in is basis. The pilot deposit and all of the growth would be taxable when withdrawn, for both federal and California purposes. Those figures are illustrations, not projections, but they show why the question of who controls a six-figure account at 18 deserves as much thought as the tax treatment.

What about children with disabilities or families who may need public benefits?

The Social Security Administration’s program manual, at POMS SI 01120.250, says a Trump account isn’t counted as a resource for Supplemental Security Income while the child is in the growth period, but becomes countable after 18. For a child with a disability, that makes the timing of the one-time rollover to an ABLE account important; the federal statute permits a rollover in the year the child turns 17. Families in that situation should plan the account alongside a special needs trust rather than in isolation. Medi-Cal’s reinstated asset test, effective January 1, 2026, applies only to certain non-MAGI programs, and the state hasn’t issued guidance addressing Trump accounts.

One more estate planning detail: if a child dies before the growth period ends, § 530A(d)(6) treats the account’s value above basis as taxable income to the person who receives it, or to the child’s final return if the estate takes it. That’s a small risk, but it’s another reason to coordinate beneficiary designations and trust planning with these accounts.

Frequently Asked Questions

Does California tax Trump accounts?

SB 180, enacted in July 2026, generally conforms California to the federal treatment starting with the 2026 tax year, so growth isn’t taxed annually and withdrawals are taxed when made. The FTB hasn’t yet updated its published guidance.

How much can a grandparent contribute to a grandchild’s Trump account?

Total contributions from family and friends are capped at $5,000 per child per year. The $1,000 federal pilot deposit and certain government or charitable contributions don’t count against that limit.

Do I need to file a gift tax return for a Trump account contribution?

Not if you meet Revenue Procedure 2026-25: cash contributions only, total gifts to that child of $19,000 or less for 2026, and no other reason to file a Form 709 that year.

Can a trust own a Trump account or hold it until the child is older?

No. The child owns the account, and a responsible party manages it only until the growth period ends at 18. A trust funded separately is the way to control money past that age.

Does a Trump account affect SSI eligibility?

According to Social Security’s program manual, the account isn’t a countable resource for SSI during the growth period but becomes countable after the child turns 18.

Which children get the $1,000 federal deposit?

U.S. citizen children with Social Security numbers born after December 31, 2024 and before January 1, 2029, if a parent or other eligible person makes the election.

How North Star Law Firm Can Help

North Star Law Firm helps California families fit new savings tools into an estate plan, including trusts that control money after 18, gifting strategies that avoid unnecessary gift tax filings, and planning for children with disabilities. Phillip Zagotti is a California attorney and a CPA and co-author of Trusted: The Essential Guide for Trustees. Learn more about the firm’s revocable living trust work, its special needs and Medi-Cal planning, and its trust and estate tax return services, or schedule a consultation to review a grandchild gifting plan.

September 5, 2026

California’s 2027 Minimum Wage ($17.40) and the $72,384 Exempt Salary Line: A Guide for Inland Empire and Sacramento Small Businesses

California’s statewide minimum wage goes from $16.90 to $17.40 an hour on January 1, 2027, following the Department of Finance’s certification at the end of July. Most employers read that as a 40-cent line item for hourly staff. The bigger number is hidden one step away. California ties the salary floor for exempt executive, administrative, and professional employees to twice the minimum wage, so on New Year’s Day the minimum salary for an exempt office manager becomes $72,384 a year. A salaried manager at $70,000 in a Rancho Cucamonga dental office or a Sacramento HVAC company isn’t just due for a raise next year. That manager is already below the 2026 line.

How is California’s minimum wage set each year?

Labor Code § 1182.12(c) requires the Director of Finance to calculate the adjustment by August 1. The increase is the lesser of 3.5% and the change in the U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers over the July-to-June period, rounded to the nearest ten cents, and it can’t go down. This year the index rose just under 3%, which moves $16.90 to $17.40. The Department of Industrial Relations announced the figure and the resulting salary threshold in a news release.

What does the new rate mean for exempt salaried employees?

Labor Code § 515(a) sets the salary floor for exempt executive, administrative, and professional employees at double the state minimum wage for a 40-hour week. For 2027 that’s $17.40 times 2 times 2,080 hours, or $72,384 a year, which is $6,032 a month. The 2026 figure is $70,304. The threshold uses the full-time amount even for someone who works a reduced schedule, so a three-day-a-week exempt controller needs the same salary as a full-time one.

Salary alone never makes someone exempt in California. The employee must also be primarily engaged in exempt duties, which California measures as more than half of actual worktime, and must regularly exercise discretion and independent judgment. The federal test is looser. After a federal court vacated the Labor Department’s 2024 salary rule, the department formally restored the $684-a-week federal threshold in a May 15, 2026 technical amendment. That’s $35,568 a year, less than half of California’s number. Multistate employers that build pay bands around federal rules routinely miss California’s.

California wage figure	2026	2027
Statewide minimum wage	$16.90/hour	$17.40/hour
Exempt executive, administrative, professional salary	$70,304/year	$72,384/year ($6,032/month)
Computer software professional exemption (§ 515.5)	$58.85/hour or $122,573.13/year	Not yet announced
Licensed physician hourly exemption (§ 515.6)	$107.17/hour	Not yet announced
Fast food restaurant minimum wage	$20.00/hour	$20.00/hour unless the Fast Food Council acts
Federal FLSA salary level	$684/week	$684/week unless changed

Do Inland Empire or Sacramento cities have a higher local minimum wage?

Not currently. The UC Berkeley Labor Center’s inventory of local wage ordinances lists none in Riverside, San Bernardino, Sacramento, Placer, Yolo, or El Dorado counties, so the state rate governs throughout both regions. The exception to watch is geography. Unincorporated Los Angeles County and the City of Los Angeles both set their own higher rates, reported at $18.47 and $18.42 as of July 1, 2026. An Ontario or Pomona Valley employer whose service techs or merchandisers spend part of the week in those areas may owe the local rate for those hours. Local ordinances can change mid-year, so check the inventory before budgeting.

Which industries follow a different minimum wage?

Two sectors have their own schedules. Limited-service restaurants in national chains with more than 60 locations pay at least $20 an hour under the fast food law, Labor Code § 1474 and following, and as of early September the Fast Food Council hadn’t adopted an increase. Health care is more complicated. Under Labor Code § 1182.14, covered health care employers moved to new rates on July 1, 2026: $25 an hour for large health systems and dialysis clinics, $23 for most other covered facilities, and $22 for covered clinics, which step to $25 on July 1, 2027. Safety-net and rural hospitals follow a slower path. The Department of Industrial Relations’ health care minimum wage FAQ lists covered facility types, and a private dental practice isn’t one of them. A stand-alone dental office in Temecula generally follows the $17.40 state rate, though a practice affiliated with a covered clinic may not.

What does the change cost a typical small business?

Take a Sacramento HVAC contractor with two salaried office managers at $70,000 and eight full-time hourly employees at $17.00. The managers are already misclassified in 2026, because $70,000 is $304 short of the $70,304 threshold. For 2027, bringing both to $72,384 costs $4,768 in added salary, and raising the eight hourly workers to $17.40 costs $6,656. Employer Social Security and Medicare at 7.65% adds about $874. The total is roughly $12,300 a year before any overtime is paid at the higher rate. Federal and state unemployment taxes don’t increase, because each worker already earns more than the $7,000 taxable wage base, and State Disability Insurance is withheld from employees at 1.3% with no wage cap in 2026.

There’s a separate cost that has nothing to do with the raise. Because California still owes the federal government for unemployment insurance loans, employers here lose part of their federal unemployment tax credit. EDD reports the reduction for 2025 wages was 1.2%, which makes the effective federal unemployment tax $126 per employee, and it projects a 1.5% reduction for 2026, or $147 per employee, subject to the Labor Department’s final determination in November. For ten employees, the credit reduction alone would add about $1,050 for 2026. EDD’s FUTA credit reduction page tracks the numbers.

The alternative to raising salaries is converting managers to hourly pay. A $70,000 salary works out to $33.65 an hour, with overtime at $50.48, and it brings meal and rest period obligations, timekeeping, and daily overtime under the rules we covered in our post on California overtime and the federal deduction. For most small offices, the raise is cheaper than the conversion.

What’s the exposure if a salaried employee is misclassified?

It adds up faster than owners expect. An employee treated as exempt who doesn’t meet the salary or duties test can recover unpaid overtime with interest, attorney’s fees, and costs under § 1194, generally reaching back three years, or four under the Unfair Competition Law. Missed meal and rest periods add an hour of pay per workday under § 226.7, and the California Supreme Court held in Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93 that those premiums are wages, which can support wage statement claims under § 226 (capped at $4,000 per employee) and waiting time penalties of up to 30 days’ pay under § 203 when the employee leaves. On top of that, the Private Attorneys General Act allows civil penalties, though the 2024 reforms cap them at 15% or 30% of the default amount for employers that take reasonable compliance steps before or promptly after receiving notice.

Does any of this apply to S corporation owners who pay themselves a salary?

The tax rule and the wage rule are separate questions, and owner-employees sometimes blur them. For federal tax purposes, an S corporation shareholder who works in the business must take reasonable compensation as wages, as the IRS explains in its guidance on S corporation officers. Reasonable compensation is measured against what the services are worth, not against the exempt salary floor. California wage-and-hour law, meanwhile, has no general exception for owners who draw a salary. The federal regulation that treats a 20% owner who actively manages the business as exempt regardless of pay doesn’t appear to have a California counterpart. An owner-manager who draws $50,000 in wages to hold down payroll tax isn’t automatically exempt under § 515, and that can matter if the relationship among co-owners sours and one of them files a wage claim. Planning the owner’s salary is worth doing with both rules on the table.

Frequently Asked Questions

What will California’s minimum wage be in 2027?

$17.40 an hour statewide starting January 1, 2027, up from $16.90. Some cities and industries, including fast food and covered health care employers, have higher rates.

What is the minimum salary for an exempt employee in California in 2027?

$72,384 a year, or $6,032 a month, which is two times the state minimum wage for full-time work. The 2026 threshold is $70,304.

Can I pay a part-time exempt employee a prorated salary?

No. The salary test is based on full-time employment, so an exempt employee working a reduced schedule still needs at least the full threshold amount to keep the exemption.

Do Riverside or San Bernardino County cities have their own minimum wage?

Not currently. The state rate applies there and in the Sacramento region, but workers who spend time in unincorporated Los Angeles County or the City of Los Angeles may be owed those local rates.

Does the health care minimum wage apply to dental offices?

Private dental practices aren’t on the state’s list of covered health care facilities, so they generally follow the statewide minimum wage. Practices tied to a covered clinic should check their status.

Does the federal $684-a-week salary level matter in California?

Only for federal overtime purposes. California employers must meet the higher state threshold and California’s stricter duties test to treat an employee as exempt.

How North Star Law Firm Can Help

North Star Law Firm helps California small businesses review exempt classifications, budget payroll changes, and set owner compensation that works under both wage-and-hour law and tax law. Phillip Zagotti is a California attorney and a CPA, so a classification review can include the payroll tax and S corporation consequences in the same engagement. Learn more about the firm’s business and contract law practice, its payroll tax work, and S corporation planning, or schedule a consultation before your 2027 budget is final.

September 4, 2026

No Tax on Overtime Meets California Daily Overtime: Which Hours Count, What Code TT Shows, and Why California Still Taxes It

California has the most generous overtime law in the country, and that’s exactly why the federal “no tax on overtime” deduction confuses so many California workers and payroll departments. A warehouse lead in Fontana who works ten-hour days earns California daily overtime from the ninth hour on. The federal deduction doesn’t care about daily overtime. It follows the Fair Labor Standards Act, which counts only hours over 40 in a workweek, and only the half-time premium on those hours. The IRS confirmed that approach in August 2026 when it replaced its January guidance with Fact Sheet FS-2026-13, and starting with 2026 wages, the number on the employee’s Form W-2 largely controls the deduction.

What does the federal overtime deduction allow?

The One Big Beautiful Bill Act added 26 U.S.C. § 225. For 2025 through 2028, it allows a deduction of as much as $12,500 of qualified overtime compensation, with a $25,000 ceiling for married couples filing jointly. Once modified adjusted gross income passes $150,000 ($300,000 joint), the ceiling shrinks by $100 per $1,000 of excess income. Claiming it requires a work-authorized Social Security number and, for married taxpayers, a joint return, but non-itemizers can take it.

“Qualified overtime compensation” is narrow by design. The statute limits it to overtime required under section 7 of the FLSA that exceeds the regular rate. FAQ 12 of the fact sheet turns that into a formula: FLSA hours over 40 in the workweek, times one-half, times the FLSA regular rate. On a time-and-a-half hour, only the extra half counts.

Why doesn’t California daily overtime count?

Labor Code § 510 requires time and a half after eight hours in a day, after 40 hours in a week, and for the first eight hours on the seventh consecutive workday, plus double time after 12 hours in a day and after eight hours on the seventh day. The FLSA requires none of the daily pieces. FAQ 16 of the IRS fact sheet addresses this directly: overtime an employer pays under state law, a union contract, or its own policy qualifies only to the extent it’s needed to satisfy the federal requirement, and the IRS specifically calls out premiums for hours beyond eight in a workday. In the fact sheet’s own example, a $20-an-hour worker puts in 50 hours and receives $400 of double-time pay for the 10 extra hours, and only $100 of it qualifies.

California’s state income tax doesn’t follow any of this. The Franchise Tax Board’s summary of federal tax changes lists California as not conforming to the overtime deduction, though it does conform to the related information reporting rules. California’s conformity date is January 1, 2025, which predates the federal law. Two 2026 bills that would have created a state version, AB 1550 and AB 2336, stalled in committee in April 2026. For now, California taxes every dollar of overtime.

Which California workers get state overtime but no federal deduction?

More of them than most payroll teams realize. The four-day, ten-hour schedule is the simplest case. A worker on four tens without a valid alternative workweek election under Labor Code § 511 earns eight hours of California daily overtime each week, but works exactly 40 FLSA hours, so the federally qualified amount is zero.

Logistics workers present a subtler gap. The FLSA motor carrier exemption in 29 U.S.C. § 213(b)(1) reaches drivers, driver’s helpers, loaders, and mechanics whose work affects the safety of interstate vehicles, according to the Labor Department’s Fact Sheet 19. California’s Wage Order 9 removes overtime only for employees whose own hours are regulated by federal or CHP hours-of-service rules, which usually means drivers. So a dock loader or yard mechanic at an Ontario carrier can be owed full California overtime while qualifying for nothing federally. Central Valley farmworkers are another example: California agricultural overtime reached the full eight-hour and 40-hour standard in 2022 for employers with more than 25 workers and in 2025 for smaller ones, but the FLSA exempts most agricultural labor.

Salaried employees can fall into the gap too. A Sacramento operations manager earning $112,000 may satisfy the federal highly compensated employee test while spending most of the day on nonexempt work, which makes the manager nonexempt under California’s “primarily engaged” rule. That manager is owed California overtime with a Code TT amount of zero. And the IRS’s 20% owner rule in FAQ 5 treats an employee with a bona fide 20% equity stake who actively manages the business as an exempt executive, which matters for family businesses that put owners on hourly payroll.

Worker	California overtime owed?	Federal qualified overtime (Code TT)?
Warehouse worker, five 10-hour days (50 hours)	Yes, 10 hours at 1.5x	Yes, 10 hours of half-time premium
Four 10-hour days, no valid alternative workweek	Yes, 8 hours at 1.5x	No, only 40 FLSA hours
Hour 13 of a single workday	Double time	Only the FLSA half-time amount, if the week exceeds 40
Dock loader or mechanic at an interstate motor carrier	Generally yes	No, FLSA motor carrier exemption
Interstate truck driver subject to DOT hours-of-service rules	Generally no, Wage Order 9 § 3(L)	No
Farmworker working 60 hours in a week	Yes	Generally no, FLSA agricultural exemption
Hourly employee who owns 20% and manages the company	Depends on California exemption tests	No, IRS FAQ 5

What does the Code TT number look like for a Fontana warehouse worker?

Take a single worker at $24 an hour with no alternative workweek. For 36 weeks of the year she works five ten-hour days. For 12 weeks she works four ten-hour days plus one 13-hour day. In a 50-hour week, California pays ten hours at $36, and the FLSA-required premium is also ten hours at $12, or $120, so the two laws line up. In the 53-hour week they split. California pays 12 hours at time and a half and one hour at double time, a $168 premium, while the FLSA requires only 13 hours at the $12 half-time rate, or $156.

Across the year, her gross pay is $64,800, her California overtime premiums total $6,336, and her Box 12, Code TT amount should be $6,192. Using the 2026 single standard deduction of $16,100, her federal taxable income drops from $48,700 to $42,508, which is still inside the 12% bracket, so the deduction saves $743.04. California taxes the full $64,800. Compare a coworker who loads trucks for the company’s interstate carrier at $26 an hour and works 50-hour weeks for 48 weeks. If the motor carrier exemption applies to him, he collects $6,240 of California overtime premium and has a Code TT figure of zero.

What if the W-2 amount is wrong?

For 2026 and later, the worker is stuck with the lesser of what was actually paid and what’s reported in Box 12, Code TT, under FAQs 20 through 23. If the employer overstates it, the deduction is still limited to the real amount. When the employer reports too little, the worker has to get a Form W-2c, because FAQ 23 rules out filing Form 4852 as a substitute. FAQ 11 requires employers who find an error to issue the W-2c, and information return penalties under 26 U.S.C. §§ 6721 and 6722 apply to uncorrected forms.

California employers have one extra complication. Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542 requires flat-sum bonuses to be folded into the overtime rate using only nonovertime hours as the divisor, which produces a higher number than the federal method. In a 50-hour week at $24 with a $50 attendance bonus, California requires about $13.75 more than the FLSA does, and that $13.75 isn’t qualified. Payroll systems built around California rules will overstate Code TT unless they run a separate federal calculation.

What should employers and employees do now?

Employers should confirm that payroll can calculate FLSA overtime by workweek, separate from California daily overtime and double time, and should review which workers fall under the motor carrier, agricultural, and executive exemptions federally even when California overtime is paid. Expect questions when the wage statement shows 1.5x and 2x hours but the W-2 shows a smaller Code TT figure. Employees shouldn’t reduce withholding automatically: FAQs 8 and 9 say employers keep withholding unless a new Form W-4 is filed, and anyone who lowers federal withholding for the deduction shouldn’t carry that change onto the California DE 4, since the state won’t allow it. If your company also has repayment or correction issues pending, our post on California’s stay-or-pay law walks through the W-2c mechanics.

Frequently Asked Questions

Does California allow the no tax on overtime deduction?

No. California doesn’t conform to the federal overtime deduction, so overtime remains fully taxable on the California return. Bills to create a state version stalled in committee in April 2026.

Does California daily overtime qualify for the federal deduction?

Only the portion the FLSA would require. Daily overtime after eight hours and double-time premiums qualify only to the extent of the half-time premium on hours over 40 in the workweek.

What is Box 12, Code TT on my W-2?

It reports qualified overtime compensation, the FLSA half-time premium on hours over 40. Starting with 2026, your deduction is limited to the lesser of that amount and what you were actually paid.

Can I use my own time records if my employer’s Code TT figure is too low?

No. Ask your employer to issue a Form W-2c. According to the IRS, Form 4852 can’t be used to increase the reported amount for this deduction.

Do truck drivers get the federal overtime deduction?

Usually not. Drivers, loaders, and mechanics covered by the FLSA motor carrier exemption have no FLSA overtime, so none of their overtime qualifies, even if California or the employer pays overtime.

How much can I deduct?

The cap is $12,500 per year for single filers and $25,000 for joint returns through 2028. It phases down as modified AGI rises above $150,000, or $300,000 for couples.

How North Star Law Firm Can Help

North Star Law Firm helps California employers sort out payroll tax reporting, worker classification, and information return corrections, and it represents businesses when EDD or IRS payroll issues turn into assessments. Phillip Zagotti is a California attorney and a CPA, so the wage-and-hour question and the W-2 reporting question get answered together. Learn more about the firm’s sales and payroll tax practice, its penalty abatement work, and the wider Tax Law practice, or schedule a consultation to review your payroll setup before year-end W-2s.

September 3, 2026

Assignment for the Benefit of Creditors in California: How It Compares to Chapter 7 and Delaware’s New Uniform ABC Act

Delaware adopted the Uniform Assignment for the Benefit of Creditors Act on June 10, 2026, and the national bankruptcy bar has spent the summer calling it a faster, cheaper alternative to a Chapter 11 sale. California owners reading those alerts should know something the Delaware coverage mostly skips. California has run assignments for the benefit of creditors, usually called ABCs, for decades without a court, and the California version gives the assignee a power the new uniform act deliberately leaves out. For a struggling manufacturer in Perris or a restaurant group in Rancho Cucamonga, the choice among an ABC, Chapter 7, and Chapter 11 is one of the most consequential decisions an owner will make, and it usually has to be made quickly.

How does an assignment for the benefit of creditors work in California?

An ABC is a state-law liquidation. The company signs a general assignment, and everything it owns that isn’t exempt passes to a neutral professional called the assignee. The assignee liquidates the property and pays creditors from what it brings in, while the owners and managers step aside. Code of Civil Procedure § 493.010 defines the general assignment, and § 493.030 terminates attachment liens created within 90 days before it. In California there’s no petition, no judge, and no public docket unless someone sues. The Court of Appeal described the arrangement in Sherwood Partners, Inc. v. EOP-Marina Business Center (2007) 153 Cal.App.4th 977 as a transfer of the debtor’s assets in trust to the assignee, and it held that the assignee doesn’t take on the company’s lease obligations just by accepting the assignment.

The statutory framework is thin but specific. Under § 1802, the assignee must send written notice to creditors within 30 days of accepting the assignment and set a claims deadline between 150 and 180 days after that notice. Employees get a priority under § 1204 of up to $4,300 each for wages, commissions, vacation, and severance earned in the 90 days before the assignment. Revenue and Taxation Code § 19089 requires the assignee to notify the Franchise Tax Board within 10 days. The California Lawyers Association’s Insolvency Law Committee publishes an ABC desk guide that practitioners rely on for the rest.

What did Delaware and the uniform act change?

The Uniform Law Commission approved the act in 2025, and Delaware’s version, Senate Bill 267, replaced that state’s old ABC statute effective June 10, 2026. Law firm summaries count several other adopting states, including Utah and Arizona. The uniform act standardizes notice and claims procedures, authorizes the assignee to keep the business running, borrow money, and hold an auction, and sets a distribution order. Practitioner summaries report that Delaware’s version also sends the assignee to the Court of Chancery with a petition within 14 days. What the uniform act doesn’t do is give the assignee its own preference claim. It lets the assignee pursue only avoidance rights that a creditor could already bring under other law, such as a fraudulent transfer claim.

California hasn’t introduced the uniform act. The California Commission on Uniform State Laws voted in June 2025 to support it at the national level, and one law firm reports that a California Lawyers Association subcommittee is studying enactment, but we haven’t found a bill. For now, a California company assigning in California uses California’s existing rules.

Can a California assignee claw back preference payments?

Yes, and this is the feature that makes California different. Code of Civil Procedure § 1800 lets the assignee recover payments made to creditors in the 90 days before the assignment, or one year for insiders who had reasonable cause to believe the company was insolvent, with insolvency presumed during the 90-day window. The suit has to be filed within one year after the assignment. The statute borrows most of the Bankruptcy Code’s defenses, with two differences vendors should notice. Its ordinary course defense still uses the pre-2005 three-part test, requiring the debt to have been incurred in the ordinary course, paid in the ordinary course, and paid on ordinary business terms, where federal law now requires only one of the last two. And it has no minimum dollar floor, while the Bankruptcy Code shields non-consumer transfers under $8,575.

There’s a real question whether § 1800 survives federal preemption. The Ninth Circuit held it preempted in Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005), reasoning that it intruded on the federal bankruptcy power. The following year the Court of Appeal expressly disagreed in Haberbush v. Charles & Dorothy Cummins Family Ltd. Partnership (2006) 139 Cal.App.4th 1630. State courts follow Haberbush; federal courts in the Ninth Circuit are bound by Lycos. So a vendor sued in Riverside Superior Court faces the claim, while one with grounds to remove to federal court may not. Our firm’s preference clawback defense page covers the federal version of these defenses.

How does an ABC compare with Chapter 7 and Chapter 11?

Feature	California ABC	Chapter 7	Chapter 11 / Subchapter V
Who runs it	Assignee chosen by the company	Trustee appointed by U.S. Trustee	Management as debtor in possession
Court supervision	None unless litigation arises	Full	Full
Automatic stay	No	Yes	Yes
Sale free and clear, contract assignment over objection	No; requires lender and counterparty cooperation	Yes (§§ 363, 365)	Yes (§§ 363, 365)
Preference recovery	§ 1800, 90 days, stricter defenses, preemption contested	§ 547, 90 days	§ 547, 90 days
Speed to a going-concern sale	Often days to weeks	Usually slower; businesses rarely operate	Weeks to months
Public filing	No	Yes	Yes
Eligibility limits	None	None for businesses	Subchapter V capped at $3,424,000 of debt

The missing stay is the biggest practical weakness. An ABC works best when the secured lender is on board and the buyer is already lined up. It also carries an involuntary bankruptcy risk that owners should plan around. Under 11 U.S.C. § 303(h)(2), three unsecured creditors holding at least $21,050 in claims can force the company into bankruptcy without proving it’s generally not paying debts if a custodian, which includes an assignee, took possession within the prior 120 days. After 120 days, § 543(d)(2) directs the bankruptcy court to excuse the assignee from turning property over unless that’s needed to prevent fraud or injustice.

Is your company running out of runway, or has a lender already sent a default notice? The window to choose between an ABC, Chapter 7, and Subchapter V can close in weeks. Get the options on paper while you still have them.

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What does the choice look like for an Inland Empire manufacturer?

Consider a frozen-food manufacturer in Perris, organized as an S corporation with two equal owners and 85 employees. It owes its bank $4 million on a blanket lien that both owners guaranteed, $2.5 million to trade creditors, and $140,000 in accrued wages. At $6.64 million of debt, it isn’t eligible for Subchapter V today. The Senate passed a bill on August 3, 2026 to restore the $7.5 million limit, but the House hadn’t passed it as of this writing.

Assume an assignee can sell the plant as a going concern for $2.6 million and collect $1.1 million of receivables, and that costs run $250,000 with the bank agreeing to carve out the wage claims. The bank recovers about $3.31 million and has a $690,000 deficiency. If the assignee nets $135,000 from § 1800 preference suits and the bank agrees those recoveries aren’t its collateral, trade creditors get about $106,000. In a Chapter 7, where a trustee sells equipment piecemeal for an assumed $1.5 million and collects $950,000 of receivables, the statutory trustee commission alone can reach $96,750 under § 326(a). The bank’s deficiency grows to about $1.8 million, trade creditors share roughly $47,000, and the owners’ guaranty exposure is more than $1.1 million worse than in the ABC. Those figures rest on assumed sale values, but the direction is typical: a going-concern sale protects guarantors.

The tax side can’t wait until April. An asset sale by an S corporation passes gain through to the shareholders even though no cash reaches them. If equipment with a $500,000 basis sells for $1.7 million, that $1.2 million is ordinary recapture income on the owners’ personal returns. Cancellation of debt income is tested for the insolvency exclusion at the corporate level for an S corporation under 26 U.S.C. § 108(d)(7), but at the partner level for an LLC taxed as a partnership, which can leave solvent members owing tax on forgiven debt. California generally follows § 108 and adds its 1.5% S corporation tax.

What liabilities follow the owners no matter which path they pick?

None of these procedures erases the personal exposure California imposes on people who run a company. Officers and managers who willfully fail to remit collected sales tax can be held personally liable under § 6829 once the business terminates. Unemployment Insurance Code § 1735 does the same for unpaid payroll contributions and withheld income tax, and Labor Code § 558.1 reaches owners and officers for certain wage violations, including final pay. The federal trust fund recovery penalty under 26 U.S.C. § 6672 and every personal guaranty survive as well. An ABC also has its own traps: the assignee must honor the federal priority statute, 31 U.S.C. § 3713, or face personal liability, and shutting down an establishment with 75 or more employees triggers Cal-WARN notice obligations. One quiet advantage is that California’s bulk sales law in Commercial Code § 6103 doesn’t apply to a general assignment or to the assignee’s later sale.

Frequently Asked Questions

Is an assignment for the benefit of creditors the same as bankruptcy?

No. An ABC is governed by state law with no bankruptcy filing, no court supervision in California, and no automatic stay. The company transfers its assets to an assignee who liquidates them for creditors.

Has California adopted the Uniform Assignment for the Benefit of Creditors Act?

No. Delaware and several other states have adopted it, but we haven’t found a California bill. California ABCs still follow the Code of Civil Procedure and common law.

Can an assignee in California sue to recover payments made before the assignment?

Yes. Code of Civil Procedure § 1800 allows recovery of preferential payments made within 90 days, or one year for insiders. Whether it’s preempted depends on the court: state courts say no, and the Ninth Circuit says yes.

Can creditors stop an ABC by filing an involuntary bankruptcy?

They can try. Within 120 days after the assignee takes possession, three creditors with at least $21,050 in claims can file, and the court doesn’t require proof of general nonpayment.

Does an ABC eliminate my personal guaranty?

No. Guaranties, responsible person liability for sales and payroll taxes, and federal trust fund penalties survive. A better sale price can shrink the deficiency the guarantor owes.

How long does a California ABC take?

The sale can close in days or weeks when a buyer is ready. The claims process runs longer, since the claims deadline falls 150 to 180 days after the assignee’s notice to creditors.

How North Star Law Firm Can Help

North Star Law Firm advises California business owners, lenders, and trade creditors on insolvency options, including ABCs, Chapter 7 liquidations, and Subchapter V reorganizations, and it defends vendors facing clawback claims in state and federal court. Phillip Zagotti is a California attorney and a CPA admitted in the Central District of California, so the liquidation analysis, guaranty exposure, and tax consequences of a sale are modeled together rather than handed off. Owners weighing a sale of a distressed company can also review the firm’s work on buying and selling a business.

September 2, 2026

California’s Stay-or-Pay Law (AB 692): Sign-On Bonus Repayment, Training Agreements, and the Tax Side of a Clawback

For years, the standard California sign-on bonus looked the same: a check on day one and a promise to pay it back if the employee quit within a year or two. Since January 1, 2026, that promise is unlawful unless it’s built exactly the way the Legislature now requires. Assembly Bill 692, signed October 13, 2025 as Chapter 703 of the Statutes of 2025, added Business and Professions Code § 16608 and Labor Code § 926, and it reaches much further than bonuses. Training repayment agreements, quit fees, and replacement hire fees all fall inside it.

Most of the commentary has focused on HR forms. This post covers what the statute actually says, where Inland Empire logistics and healthcare employers are most exposed, and a piece nobody seems to talk about: what happens on the tax side when an employee really does pay a bonus back.

What does AB 692 prohibit?

Section 16608(b)(1) makes it unlawful to include, or to require a worker to sign, a contract term that makes the worker pay the employer, a training provider, or a debt collector if employment ends, that restarts collection on a debt when employment ends, or that imposes any penalty, fee, or cost on the worker for leaving. The definitions are deliberately broad. A “debt” counts whether it’s certain or contingent, so a conditional bonus that becomes repayable on resignation is a debt. The listed penalties include replacement hire fees, retraining fees, quit fees, immigration and visa cost reimbursement, liquidated damages, lost goodwill, and lost profit. “Employer” includes affiliates, contractors, and third-party agents, and “worker” includes applicants and training program participants.

The law applies only to contracts entered into on or after January 1, 2026. Agreements signed in 2025 aren’t voided by AB 692, although they still have to survive older rules like Labor Code § 2802 and § 16600.

When can an employer still recover a sign-on bonus?

Only through the exception in § 16608(b)(2)(D), and only if every condition is met. The payment has to be a discretionary or unearned payment made at the outset of employment that isn’t tied to job performance. The repayment terms must sit in an agreement separate from the offer letter or employment contract. The employee must be told of the right to consult a lawyer and given at least five business days to do it. Repayment can’t carry interest and has to be prorated over the remaining retention period, which can’t exceed two years from the payment date. The employee must be offered the choice to defer the bonus until the end of the retention period with no repayment obligation at all. Finally, repayment can be triggered only by a separation at the employee’s sole election or a termination for misconduct, which the statute ties to the unemployment insurance definition in Unemployment Insurance Code § 1256. A layoff, a position elimination, or a firing for poor fit ends the obligation.

Retention bonuses paid to existing employees are the harder problem. The exception covers payments “at the outset of employment,” so a mid-career retention bonus with a clawback doesn’t fit it. Employers that want the same effect can pay the retention bonus in installments as service is performed, or pay it in full on the retention date. Both approaches avoid a repayment obligation entirely.

Are training repayment agreements dead in California?

Mostly, and the details matter for the Inland Empire. The statute allows tuition repayment only for a “transferable credential,” and it defines that term as a degree from an accredited third-party institution that isn’t required for the current job and is useful for employment elsewhere. The repayment agreement must be separate from the employment contract, state the amount up front without exceeding the employer’s actual cost, prorate over the required service period without acceleration, and require nothing if the worker is terminated other than for misconduct.

Read that definition next to how warehouses in Ontario and Fontana actually train people. Employer-paid commercial driver’s license programs, forklift certifications, and similar certificates aren’t degrees. On the statute’s plain text, a clause making a driver repay CDL school costs after quitting doesn’t fit the tuition exception. The one remaining route is enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards under § 16608(b)(2)(C). Before AB 692, the Court of Appeal had upheld a voluntary training reimbursement agreement in USS-POSCO Industries v. Case (2016) 244 Cal.App.4th 197. For agreements signed in 2026 and later, that decision no longer describes the rules.

Arrangement	Can it require repayment?	Key conditions
Sign-on bonus paid at hire	Yes, if every (b)(2)(D) condition is met	Separate agreement, 5 business days to consult counsel, no interest, proration, retention period of 2 years or less, deferral option, only voluntary quit or misconduct
Retention bonus paid mid-employment	Treat as no	Pay in installments or on the retention date instead
Tuition for an accredited degree not required for the job	Yes, if every (b)(2)(B) condition is met	Separate agreement, stated amount capped at actual cost, proration, no acceleration, nothing owed on non-misconduct termination
CDL, forklift, or other certificate training	Likely no on the statute’s text, unless part of a DAS-approved apprenticeship	Certificates aren’t “degrees” under § 16608(a); no court has ruled yet
Government loan repayment or forgiveness programs	Outside the statute	§ 16608(b)(2)(A)
Quit fees, replacement-hire fees, liquidated damages	No	Listed as prohibited penalties

What happens if an employer gets it wrong?

A noncompliant term is void as against public policy under § 926(a), and § 16608(c) separately declares the contract a restraint on trade that’s void under § 16600. The worker, or a worker representative, can sue individually or on behalf of similarly situated workers for actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney’s fees. Because the statute routes the violation through § 16600, there’s a credible argument that the fee-shifting remedy and its “regardless of where and when the contract was signed” language in § 16600.5 apply as well, which undercuts the idea that an out-of-state choice-of-law clause can save the agreement. Labor Code § 925 already makes those clauses voidable for employees who live and work in California unless the employee was individually represented by counsel. Several employer-side firms also flag Private Attorneys General Act exposure. The bill doesn’t mention PAGA, and no court has decided the question yet.

A $5,000 statutory minimum per worker turns a form sign-on agreement used for 80 seasonal hires into $400,000 of potential exposure before fees. That’s the number that should drive the review.

Can the employer just take the bonus out of the final paycheck?

No. Labor Code § 221 makes it unlawful to collect back wages already paid, and the Court of Appeal held in Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1 that an employer can’t set off a debt against final wages. The Labor Commissioner’s deductions FAQ says the same about lump-sum deductions of loan balances. A compliant repayment obligation has to be collected like any other debt: a written demand, a payment plan, or a lawsuit. A business plaintiff in California small claims court is capped at $6,250, which is less than many sign-on bonuses, and suing on a noncompliant agreement invites a § 926 cross-claim.

How is a repaid bonus taxed?

Here’s where an attorney-CPA view helps, because the tax consequences land on both sides and they don’t mirror each other. Consider an Ontario distribution center that pays a forklift supervisor a $12,000 sign-on bonus on March 2, 2026, under a compliant agreement with a 24-month retention period. He resigns at the end of month nine. The most he can owe is the prorated share for the 15 months remaining: 15/24 of $12,000, or $7,500.

His take-home on the bonus was smaller than that. With flat supplemental withholding of 22% federal and 10.23% California, plus Social Security, Medicare, and 1.3% State Disability Insurance, the net check was $7,058.40. He owes back gross dollars, which is more than he ever received.

If he repays in 2026, the employer simply reduces his 2026 wages and adjusts withholding and FICA through Form 941-X, as IRS Publication 15 describes. If he repays in 2027, his 2026 Form W-2 box 1 doesn’t change. The employer issues a Form W-2c reducing Social Security and Medicare wages, refunds his share of FICA after getting his written statement, and recovers both shares on Form 941-X. California’s EDD says employers shouldn’t refund prior-year personal income tax withholding.

For his own return, federal law allows relief only if the repayment is more than $3,000, through the claim-of-right rule in 26 U.S.C. § 1341. At a 12% bracket, the credit method would give him about $900. There’s a caveat worth stating plainly: we haven’t found a ruling applying § 1341 to a bonus clawback triggered by a voluntary resignation, and the IRS could argue he had an unrestricted right to the money when he received it. Repayments of $3,000 or less get nothing federally, because the suspension of miscellaneous itemized deductions is now permanent. California is friendlier. It never adopted that suspension, so a smaller repayment remains a miscellaneous itemized deduction subject to the 2% floor, and Revenue and Taxation Code § 17049 supplies a state claim-of-right rule for larger amounts.

What should California employers do now?

Pull every offer letter, bonus agreement, training agreement, and relocation package template used since January 1, 2026, and sort them by the table above. Move any repayment terms into a stand-alone agreement with the attorney-consultation notice and a deferral election. Replace mid-employment retention clawbacks with installment or cliff payments. Stop using certificate training repayment clauses unless the program runs through a DAS-approved apprenticeship. And coordinate with payroll before the first repayment arrives, because the W-2c and 941-X steps are easy to miss in January.

Frequently Asked Questions

Does AB 692 apply to agreements signed before 2026?

No. It applies to contracts entered into on or after January 1, 2026. Older agreements are still subject to prior California law, including Labor Code § 2802 and Business and Professions Code § 16600.

Can a California employer make a new hire repay a sign-on bonus?

Yes, but only under a separate agreement with a five-business-day attorney review notice, no interest, proration over a retention period of two years or less, an option to defer the bonus, and repayment only after a voluntary resignation or misconduct termination.

Can an employer require repayment of a retention bonus?

Retention bonuses paid after the start of employment don’t fit the statutory exception. Employers typically pay them in installments or on the retention date instead of up front with a clawback.

Can I be required to repay CDL or forklift training costs if I quit?

Generally not under an agreement signed in 2026 or later. The tuition exception covers only accredited degrees. Certificate training repayment is allowed only through a state-approved apprenticeship program.

What are the penalties for a noncompliant stay-or-pay clause?

The term is void, and the worker can recover actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney’s fees, individually or as a class.

Is a repaid sign-on bonus tax deductible?

Federally, only repayments over $3,000 qualify, through the claim-of-right rules, and their application to a voluntary quit isn’t settled. California still allows smaller repayments as a miscellaneous itemized deduction and has its own claim-of-right statute.

How North Star Law Firm Can Help

North Star Law Firm drafts and reviews employment-related agreements for California businesses, including sign-on bonus, tuition, and relocation agreements, and it handles the payroll tax corrections that follow when money comes back. Phillip Zagotti is a California attorney and a CPA, which lets the firm answer the contract question and the W-2c question in the same conversation. See the firm’s contract drafting and review services, its broader business and contract law practice, and its payroll tax work. Employers updating 2026 templates can schedule a consultation to walk through their forms.

September 1, 2026

Leaving California for Texas or Nevada: How the FTB Residency Audit Works and How Business Owners Win It

Moving to Austin or Henderson doesn’t end a California tax problem. It usually starts one. The Franchise Tax Board finds most of its residency cases the simplest way possible: someone files a part-year or nonresident return, Form 540NR, the year they leave, and the year of a big sale or bonus is almost always the same year. For a business owner in Riverside or San Bernardino County who sells a company after relocating, the difference between winning and losing that audit can run well into six or seven figures, and Texas and Nevada won’t give a credit for any of it because neither state taxes individual income.

The good news is that residency cases are won or lost on facts the taxpayer controls, most of them before the move is even finished. The bad news is that the FTB auditor will reconstruct those facts from bank records and credit card swipes whether the taxpayer kept a diary or not.

Who counts as a California resident?

Under Revenue and Taxation Code § 17014, a resident is anyone in California for other than a temporary or transitory purpose, and anyone domiciled here who is away only for a temporary or transitory purpose. Those two tests do different work. Domicile is the one true, fixed, permanent home a person intends to return to, and a person can have only one. Residence turns on presence. The Court of Appeal made that distinction concrete in Whittell v. Franchise Tax Board (1964) 231 Cal.App.2d 278, holding a Nevada-domiciled couple taxable as California residents because they spent most of each year at their Lake Tahoe estate.

The regulation behind the statute, Cal. Code Regs., tit. 18, § 17014, tells auditors to find the state with which the person had the closest connection during the year. Two statutory rules sit on top of that. Section 17016 presumes anyone who spends more than nine months of the year here is a resident. Section 17014(d) offers a safe harbor for a domiciliary who leaves under an employment-related contract for at least 546 consecutive days, but it’s narrow: it disappears if intangible income tops $200,000 in any year of the contract or if the main purpose of the absence is avoiding tax, and it does nothing for an owner who simply decides to relocate.

How does the FTB actually run a residency audit?

The FTB’s Residency and Sourcing Technical Manual is public, and it reads like a playbook. The audit opens with a contact letter and a series of Information Document Requests, each with a 30-day response date. Auditors then build a physical presence calendar from credit card statements, bank records, airline tickets, and the locations where checks were processed. When records are slow to arrive, the manual describes getting them from the bank with a signed authorization.

The factors come from the Board of Equalization’s 2003 decision in Appeal of Bragg: where the family lives and the kids go to school, the size and value of homes in each state, whether a homeowner’s exemption is still claimed, where the doctors and dentists are, club memberships, vehicle registration, driver’s license, voter registration, business interests, and professional licenses. The Office of Tax Appeals now groups them into three buckets, following Appeal of Mazer, 2020-OTA-263P: physical presence and property, personal and professional associations, and registrations and filings. That third bucket carries the least weight. A Texas driver’s license obtained in week one is expected; it proves very little if the family still sleeps in Corona most weekends.

Why do people with Texas licenses and Nevada addresses still lose?

Because the move was a paperwork move. Appeal of Bracamonte, 2021-OTA-156P, is the case every Inland Empire seller should read. The owners of an aviation services company rented a Henderson apartment, registered to vote in Nevada, got Nevada licenses, and opened Nevada bank accounts in early 2008. They also kept their large California home with its furnishings and spent far more days in California than Nevada before their company sale closed that July. OTA sustained a 2008 assessment of $1,592,648 and repeated the rule that makes these cases hard: the FTB’s residency determination is presumed correct, and when domicile is in doubt, it’s found not to have changed.

In Noble v. Franchise Tax Board (2004) 118 Cal.App.4th 560, a couple claimed Colorado residency from March 1 but sold securities later that month while still living here, and they lost. Appeal of Beckwith, 2022-OTA-332P, shows the reverse trap: a man who had really moved to Tennessee bought a California home years later, spent about 170 days here, and was a resident again when his shares were exchanged.

Received an FTB residency questionnaire, Information Document Request, or Notice of Proposed Assessment? The first written response frames the whole audit. Talk it through with an attorney and CPA before you send it.

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What income can California still tax after a genuine move?

Winning on residency isn’t the end of the analysis, because nonresidents still owe California tax on California-source income, and the sourcing rules are where business owners get surprised. Section 17952 sources gain on stock and other intangibles to the seller’s state of residence, so a true Texas resident who sells S corporation stock generally owes California nothing on that gain. Change the deal structure and the answer flips. Under Regulation 17951-4, a nonresident shareholder’s share of income from a business run entirely in California is California-source, and the FTB’s manual applies that to goodwill gain that flows through when the company sells its assets or the buyer insists on a deemed asset sale election. For a Fontana trucking company or a Temecula medical practice, that can put the whole gain back on a California return.

Timing matters too. Regulation 17952(d) fixes the source of an installment sale when the sale happens, so a note signed while the seller was a Californian keeps producing California-source gain on every payment after the move, though the interest isn’t California-source. Retirement income runs the other way: 4 U.S.C. § 114 bars states from taxing nonresidents on qualified plan, IRA, and similar distributions, while nonqualified deferred compensation is protected only if it’s paid in substantially equal periodic payments over at least ten years or life, or under certain excess benefit plans.

What does the math look like for an Inland Empire business owner?

Take a married couple who own all of a California S corporation in Corona that operates only in California. They move to Austin on July 1, 2025, buy a house, enroll their children in Texas schools, and switch licenses and voter registration. They keep the Corona house furnished, and the husband flies back roughly eight days a month to manage the transition. On March 15, 2026, they sell their stock for $8.5 million with a $1 million basis, a $7.5 million gain.

If the Texas domicile holds up, California taxes none of that gain, though they still file a 540NR for the company’s California income from January 1 through the closing. If the FTB proves they were still residents on March 15, the gain is fully taxable. Using the 2025 joint rate schedule as a stand-in, since the 2026 schedule isn’t out, the regular tax on $7.5 million of taxable income is about $884,000, and the 1% surcharge on income above $1 million under § 17043 adds $65,000, for roughly $949,000 before interest. If the buyer had required a § 338(h)(10) election, winning on residency might not help much: the goodwill gain from a California-only business would generally be California-source, the company itself would owe California’s 1.5% S corporation tax on the deemed sale, and the gain would be measured from the company’s asset basis rather than the owners’ $1 million stock basis. The furnished house and the monthly trips are exactly what cost taxpayers in Bracamonte.

Income received after a move out of state	California tax?	Authority
Gain on sale of S corporation or C corporation stock	Generally no, if residency has truly changed by the sale date	RTC § 17952
Flow-through gain from an asset sale or deemed asset sale of a California-only business	Generally yes	Reg. 17951-4; FTB RSTM
Installment payments on a sale signed while a resident	Yes on the gain portion; no on interest	Reg. 17952(d)
Payment for a covenant not to compete tied to the business sale	Apportioned using the sold business’s California factors	Reg. 17951-6
IRA, 401(k), and pension distributions	No	4 U.S.C. § 114; RTC § 17952.5
Rent from the California house kept after the move	Yes	RTC § 17951
Nonstatutory stock options granted while working in California	Partly, by California workdays from grant to exercise	Appeal of Stabile, 2020-OTA-198P

How long can the FTB come back, and what happens if you don’t file?

The general assessment period is four years from filing under § 19057, extended to six years when more than 25% of gross income is omitted. Someone who files nothing gets no clock at all. Section 19087 lets the FTB estimate income and assess at any time, and a late-filing penalty of up to 25% can follow under § 19131. That’s why skipping the part-year return to avoid attention is almost always the wrong call. A filed 540NR that discloses the move and reports California-source income starts the statute running. If an audit does produce a Notice of Proposed Assessment, the protest deadline is 60 days under § 19041, and an appeal to the Office of Tax Appeals must follow within 30 days of the Notice of Action. At OTA, the taxpayer carries the burden of proof by a preponderance of the evidence.

What should a Californian do before and after moving?

Sign the sale documents after the move is real, and don’t let the closing land while the family still lives in the old house. Sell or lease the California home to an unrelated tenant if the numbers work; if you keep it, cancel the homeowner’s exemption. Move what you actually care about, from the doctors to the dog. Keep a day log from the first week along with the receipts behind it, because the auditor’s calendar will come from the same card statements. The FTB’s Publication 1031 is a useful checklist.

One more date to watch this year: Proposition 40 on the November 3, 2026 ballot would impose a one-time tax on billionaires who were California residents on January 1, 2026, according to the Legislative Analyst’s Office. If it’s approved, that measure would lean on the same § 17014 residency rules discussed here, and it would make the January 1 date the most scrutinized day of the year for a small group of taxpayers.

Frequently Asked Questions

Does spending fewer than 183 days in California make me a nonresident?

No. California has no 183-day safe harbor. Section 17016 presumes residency after nine months, but people present far fewer days have been held residents when their closest connections stayed in California.

Is getting a Texas or Nevada driver’s license enough to change my residency?

No. Licenses, voter registration, and addresses are the weakest category of evidence. The FTB and OTA look first at where you live, where your family is, and where your property and business ties are.

If I move before selling my company, will California tax the gain?

It depends on the deal. A stock sale after a genuine move is generally sourced to your new state. Flow-through gain from an asset sale or deemed asset sale of a business operating in California is generally still California-source.

Can California tax my 401(k) or pension after I leave?

No. Federal law, 4 U.S.C. § 114, prohibits states from taxing nonresidents on qualified retirement income. Nonqualified deferred compensation is protected only in limited circumstances.

How far back can the FTB audit my residency?

Usually four years from when you filed, or six years if you left out more than 25% of gross income. If you didn’t file a California return for the year in question, there’s no time limit.

What is the deadline to protest an FTB Notice of Proposed Assessment?

You have 60 days from the date of the notice to file a written protest. After the FTB issues a Notice of Action, you have 30 days to appeal to the Office of Tax Appeals.

How North Star Law Firm Can Help

North Star Law Firm represents Californians and former Californians in FTB residency audits, protests, and Office of Tax Appeals cases, and it helps owners plan a move and a business sale in the right order before the FTB gets involved. Phillip Zagotti is a California attorney and a CPA, so the presence calendars, sourcing schedules, and 540NR reporting that decide these cases are handled by the same person making the legal arguments. Learn more about the firm’s California tax defense practice, its work on structuring a business sale, and its Office of Tax Appeals representation. If a residency letter has already arrived, the firm can help you schedule a consultation and prepare the response.

August 31, 2026