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San Francisco Will Tax Employers Based on CEO Pay Ratio

San Francisco’s Measure L, which passed with the overwhelming support of the voters, will be effective in 2022 for businesses operating in the City of San Francisco. Measure L titled the “Overpaid Executive Gross Receipts Tax”, imposes a supplementary tax on gross receipts or payroll expenses of any business in which the CEO (or highest-paid managerial employee) earns more than 100 times the median compensation of its employees. Companies with a CEO pay ratio of 100:1 or more will be subject to the Measure L tax, and the tax rate will increase for every additional 100 times the CEO’s pay exceeds the median worker’s pay. The tax rate reaches its maximum level when the ratio reaches 600 to 1, with a maximum tax on payroll of 2.4% or a surcharge on the gross receipts tax of up to .6%. Businesses which are exempt from the City’s gross receipts tax due to being a small business enterprise are exempt from the pay ratio tax. Also exempt are some nonprofit organizations as well as businesses exempt from local taxation, such as banks and insurance companies. The measure is expected to generate between $60 million and $140 million a year in taxes starting in 2022, according to estimates provided by the City of San Francisco.

While, for purposes of the San Francisco tax, the CEO of a business may be located anywhere, the pool of workers which San Francisco identifies for the median pay amount is limited to those workers who are based in San Francisco. Pay will include compensation made from stock awards, bonuses, commissions, any property transferred, and any other remuneration for services.

Revenue from the tax will become part of San Francisco’s general fund.

Jackson Lewis P.C. © 2022National Law Review, Volume XI, Number 224
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About this Author

Yana Johnson, Jackson Lewis Law Firm, San Francisco, Employee Benefits Attorney
Principal

Yana S. Johnson is a Principal in the San Francisco, California, office of Jackson Lewis P.C. She has almost 20 years of experience helping clients with employee benefits and executive compensation issues.

Ms. Johnson advises clients with regard to operational, administrative and fiduciary issues which arise under ERISA plans, Internal Revenue Code Sections 280G and 409A, managing plan audits and the resolution of plan compliance issues through both the IRS's and Department of Labor's correction programs, and the design and...

415-796-5430
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