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Honoring California's Everyday Entrepreneurs

As published in Flash Report

by Vince Vasquez

Friday, May 28, 2010

This year, National Small Business Week (May 23-29) has arrived at a difficult time of hardship and sacrifice for California's business owners. Improving our economic health today should begin by protecting the smallest, and most endangered enterprises in our community.

In focus are “non-employer” or freelance firms, commercial businesses with no paid employees. From home-based software designers to independent landscapers, these “businesses of one” are vital to the health of the American economy, buoying the active labor market while providing a valuable springboard for future employers. Today, more than 21.7 million freelance firms exist throughout the country, concentrating in metropolitan areas with creative, high-skilled residents, which are found in abundance in the Golden State.

Based on the most recent figures from the Internal Revenue Service (IRS), more than 2.75 million freelance firms operate in California. The sheer size of the state’s freelance workforce is only outmatched by their contributions to the local economy, which in 2007 was an impressive $144.4 billion in combined sales, gross receipts, and other income. Though freelancing is a profitable profession for many, it comes at a heavy price, as onerous tax burdens and regulatory demands are placing increasing pressure on firms to close up shop.

Studies have shown that freelance firms are among the top tier of taxpayers who spend the most time and money on tax preparation. Freelancers also pay more local, state and federal taxes than traditional employees, and are required to estimate gross income and income tax liability on a quarterly basis. Making matters worse, state Democratic leaders are now pushing for a new back-door “freelancer tax” that will unconscionably deprive these businesses of sorely-needed profits.

At issue is a proposed 3% across-the-board withholding requirement on payments to independent contractors, a radical departure from the status quo. Ostensibly, the intent of this policy is to improve private income reporting, but its practical effect will be to create an estimated $2 billion interest-free loan for the state government to spend as it chooses. No state today requires contractor withholding, yet budget and political crises have kept the issue an active threat to California's entrepreneurs.

Just last year, legislation advanced at the state capitol by Senator Denise Ducheny (D-Chula Vista) would not only have created a 3% freelancer tax, but would also have incentivized businesses to hire big corporate contractors over sole proprietors, potentially eliminating work for those who need it most. Though the bill was ultimately vetoed by Governor Schwarzenegger as a “job killer,” the freelancer tax is far from deceased. Senate President Pro-Tem Darrell Steinberg (D-Sacramento) recently called contractor withholding a “live option” during this year’s budget negotiations, and powerful public employee unions have included a withholding mandate in their list of solutions to close the state's budget gap.

A freelancer tax may have short-term benefits for state lawmakers facing monumental budget gaps, but it would deal a devastating blow to the prosperity of our independent workforce. Additional incremental revenue-grabs and “nickel and dime” policies will only push more self-employed workers out of the marketplace and delay the state’s economic recovery. Creating more paperwork will especially discourage part-time contractors that use the work flexibility to supplement their household income.

Rather than allow the freelancer tax to freely sail again through the halls of the state capitol, elected officials from both political parties should consider highlighting the challenges of freelancers, and advance targeted regulatory relief to their benefit. Easing state restrictions on entrepreneurship and passing business tax exemptions for first-time freelancers would be a start.

With approximately 2.3 million workers unemployed today throughout California, responsible lawmakers simply can't wait for state leadership to stimulate economic growth. They would be prudent to take matters into their own hands, and lay the foundation for a brighter, more prosperous tomorrow.