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Proposed Tax on Freelance Workers a Job Killer for L.A.

As published in the Los Angeles Daily News

by Vince Vasquez

Wednesday, May 5, 2010

Recently, Los Angeles Mayor Antonio Villaraigosa has pursued an aggressive job creation agenda at City Hall, advancing business-friendly reforms and new public projects designed to put residents back to work. In order to truly provide economic relief for every corner of the city, greater attention must be placed on local entrepreneurs, who are now under threat of a billion-dollar Sacramento money grab.

At issue are "nonemployer" or freelance firms, commercial enterprises that have no paid employees. From home-based yoga instructors to independent gardeners, these "businesses of one" are vital to the health of our national economy, buoying the active labor market while providing a springboard for business expansion and future employers. Though it may come as a surprise to many, government data reveals that hundreds of thousands of Los Angeles residents are in fact freelancers.

Based on the most recent statistics from the Internal Revenue Service, more than 842,000 freelance firms operate in Los Angeles County, which in 2007 reported an impressive $44.4 billion in sales, gross receipts, commission and other income - an economic powerhouse by any measure. The types of business activities that these firms specialize in range across hundreds of categories, but are weighted heavily among high-skilled creative and technical fields, and the day-to-day services that keep Los Angeles moving.

Though their differences may define them, freelancers are united in their common struggle to comply with a growing regimen of government red tape and tax reporting requirements. Specifically, freelancers pay more local, state and federal taxes than traditional employees; are required to estimate the income tax on future gross income; and face stiff penalties for tax payment errors, which are conducted in quarterly installments.

Studies have also shown that self-employed workers are among the top tier of taxpayers who spend the most time and money preparing their taxes, which can be substantial; a typical small business owner may confront more than 200 IRS forms and schedules in any given tax year. Making matters worse, a new tax proposal to balance the state government's budget on the backs of independent contractors will, if implemented, cost California thousands of freelancer jobs.

In focus is a proposed 3 percent 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 tax law compliance, but its practical effect is to allow state government to borrow more than an estimated $2 billion from the gross receipts of businesses that are likely already in legal compliance, or have no tax liability at all.

Despite its well-known flaws, legislation advanced at the state Capitol last year would have required a 3 percent tax withholding on independent contractor payments, as well as incentivized businesses to hire larger, corporate contractors over sole proprietors, potentially drying up work opportunities for those who need it most.

Though the bill rallied strong opposition from the California Chamber of Commerce as a "job killer" and was ultimately vetoed last July by Gov. Arnold Schwarzenegger, the issue is far from over.

Rather than allow withholding to advance in Sacramento and eliminate jobs, elected officials at L.A. City Hall should set a different tone and consider new proactive ways to provide targeted regulatory relief to freelance firms. With approximately 600,700 workers unemployed today throughout L.A. County, local leaders shouldn't wait to find out if withholding mandates will be the straw that breaks the camel's back.