NOTICE

Owners of Sole-proprietorships and Partnerships are not considered employees and should not be paid as one.  These individuals must pay quarterly estimated taxes, federal and state.  If you are paying yourself, under these circumstances stop paying yourself immediately, and contact your accountant or CPA for advise.  However, if the business is incorporated, corporate officers who work in the business are employees.

I also "strongly" recommend that you never except verbal information over the phone from anyone.  Ask for a written copy to be sent or faxed to you directly.  This way if there is ever a problem in the future your will have written documentation to back up your clam. 

Below is the correspondence from the Employment Development Department stating the facts.

Philip,

You are correct.  A sole-proprietor or a partner in a partnership are not
considered an employees, but officers of corporations are.  Please refer to
Information Sheet DE 231 which defines "employee".  Here is a direct link:
http://www.edd.ca.gov/de231.pdf

Gloria Wahlstrom
Taxpayer Education and Assistance Program
Employment Development Department
http://www.edd.ca.gov/eddmail.htm
1-888-745-3886
EDD Electronic Comment
Date Entered & Time - 2003-03-31 12:48:49
Record Number - 61625
Name: Philip Gibson
E-Mail Address: gibson3@pacbell.net
Phone Number: 831-461-9705
FAX Number: 831-461-9706
Address:
5524 Scotts Valley Drive
Suite #21
City: Scotts Valley
State: CA Zip Code: 95066-3464

Topic: Payroll Tax

Comments:
I have been told by an Accountant that it is common knowledge that a partner
of a partnership needs to have payroll taxes taken out as if they were an
employee. From what I know only Officers of Corporation are allowed to do
this. Sole proprietors and partnerships must pay estimated quarterly taxes.
Is this correct?