California is like that one friend who keeps insisting to help organize your closet because she loves it and wants to be helpful- but then you can’t find anything and it sorta makes it worse.
Nevertheless- here we are.
So this month there is lots of conversation and freak-out about California Bill 5 [AB5]- Net net on Jan 1: freelancers no longer allowed, must be independent contractor OR employee. Here are the three things the individual needs to have to prove they do not need to be an employee*…
AUTONOMY: The worker is free to perform services without the control or direction of the company.
SPECIALIZATION: The worker is performing work tasks that are outside the usual course of the company’s business activities.
HAS LLC/ VARIETY OF CLIENTS: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Freaking out? Wait! Many of you are exempt!**
-Doctors (physicians, surgeons, dentists, podiatrists, veterinarians, psychologists)
-Professionals (lawyers, architects, engineers)
-Professional services (marketing, human resources administrator, travel agents, graphic designers, grant writers, fine artist)
-Financial services (accountants, securities broker-dealers, investment advisors)
-Real estate agents
-Direct sales (if compensation is based on actual sales and not wholesale purchases or referrals)
-Builders and contractors
-Freelance writers and photographers (if contributes no more than 35 submissions to an outlet in a year)
-Hair stylists and barbers (if licensed and if can set own rates and schedule)
-Estheticians, electrologists, and manicurists (if licensed)
-Tutors (that teach their own curriculum, and that are not public school tutors)
-AAA-affiliated tow truck drivers
For those of you who are not on the above except list- in many cases the 3 point ‘test’ could be achieved, by establishing clear job listings showing need for differentiation of talent need and allowing more project control to reside with the individual. (Freelancers you should ASK for a copy of the job listing upon acceptance of a new project and keep on file/ employers you should pay much more careful attention to how you craft these.)
And it goes without saying, if you are a freelancer you should consider an LLC to better show you are a vendor, a contractor- A BUSINESS. If you are an employer you may wish to provide resources to help your current California freelancers set it up and encourage them to take on outside clients (FWIW set up those NDAs now, so proprietary knowledge is not leaked).
Something else that is not mentioned in AB5 but I have seen discussed in legal groups is eliminating FULL-TIME freelancers. Project based is far more favorable to the goal of AB5. If you are a full-time freelancer, or if you have hired a full-time freelancer you are the ones the bill is looking for…
Basically, in the AB5 world, a full-time freelancer = employee.
And while discussing this with a self claimed ‘tax geek’ it was mentioned that freelancers need to be filing a Schedule C. If a freelancer reports 1099 income as miscellaneous, that’s how the Franchise Tax Board will search for people who should be employees (under AB5). If the freelancer has a business bank account (e.g.: Jane McGulacutty Copy-writing Enterprises— using their full name eliminates the need for fictitious name filing) and files the 1099 income as part of their Schedule C, it will never show up as a line item for CA to question. The tax software will ask if the 1099 is for miscellaneous income or business income.
*I’m NOT a legal expert. Just a legal freak. Consult someone smarter.