FAQ ID # 1706 - Out of state owner's tax and Tenant Pro - how to accommodate the regulation requirements?

Answer / Solution

Some states require payment of taxes on management fees paid to owners. California, for example, requires a franchise tax to be paid to out-of-state owners, requiring the property manager to withhold this tax from the owner payment to be turned over to the tax agency. Tenant Pro currently has no automated way to handle this, requiring some manual calculation. The steps below provide an example of how you can calculate and manage a tax with withholdings.

Set up a new Chart of Account for “Franchise Tax” that is a Liability account type (Account #2160, for example,) and select the “Deduct Balance of this Account from Owner’s Check” option.
Post rent payments, as usual.
Run Paymatic to calculate amount due to owner. ($1000)
Calculate what the tax payment would be at the designated tax rate. (at 7% = $70)
Edit the check to the owner to reduce it by the required withholding amount. ($930)
Create a journal entry to debit the Owner Draw account (3010) for the tax withholding ($70) and credit the Franchise Tax account (2160) for the same amount.
When it is time to make the tax payment, create a check payable to the Franchise Tax Board using the Franchise Tax account (2160) as the offset. This may be for the $70 or may be an accumulation of several months withholdings.

Additional considerations:

If the tax requirement only begins after meeting a certain amount that is paid to the owner, this process will only need to be performed after that limit has been reached.
If withholdings are to be held in a separate bank account, instead of creating a journal entry as described in step 6, a check should be written to the bank account holding the funds with the offset being the Manage Fees Expense account (5010). In the holding bank account, the funds would be deposited as a Misc. Bank Transaction with the offset to the Franchise Tax account (2160). When payment is due, the check should be written from the holding account with the offset to the Franchise Tax account (2160).