On September 28, 2024 California Governor Gavin Newsom signed Senate Bill 988, the Freelance Worker Protection Act. Senate Bill (SB) 988 provides basic labor protections for freelance workers, such as the right to be paid on time and in full.

Most freelancers lack basic worker protections, most notably, the right to be paid for their work on time. According to the Freelancers Union, 71% of workers experienced late or non-payment. 59% report living paycheck to paycheck. Most do not have written contracts, as only 25% reported that they consistently have written contracts.

What Is In The Freelance Worker Protection Act?

• Mandatory contracts: Any freelancer performing over $250.00 of work for a hiring entity over a four month period is entitled to a contract outlining the scope of the work expected, the rate of pay, and the method of payment.
• 30-day payment terms: Clients must pay their freelancers within 30 days of completion of work unless otherwise specified in the contract.
• Payment agreement protections: Clients cannot require that freelancers accept less than the contract stipulates in exchange for faster payment.
• Anti-retaliation: Clients cannot retaliate against freelancers for pursuing payment.
• Double Damages: Freelancers who are the victim of non-payment are entitled to damages equal to double the payment originally specified in their contract, plus costs and attorney’s fees.

How Is A “Freelancer” Different From An “Independent Contractor”?

Freelancers and Independent Contractors are independent workers who control when, where, and how they work. They are considered self-employed. Both can work remotely unless the job requires the independent contractor to be on-site to perform their services. While they are classified the same for tax purposes, the types of projects and contracts freelancers and independent contractors work on are different.

Freelancers work project-to-project for clients, often balancing multiple contracts and clients at once. The engagement can be a longer-term hourly contract or a “one-off” project. Freelancing may offer less stability but gives talent more flexibility and control of their work. Freelancers are experts who fill skills gaps on a team, working on specific projects rather than a wide scope of work.

Independent contractors are more position-based. They work with clients on fixed-term contracts that could be full or part time.  Duration is usually longer – sometimes for years. Contract roles offer reliable pay for the duration of the contract and could even become full time once the contract ends. Independent contractors typically have a broader skill set than freelancers.

California law updated in 2020 to expand independent contractor status

California Assembly Bill (“AB”) 5 codified the California Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court and adopted the “ABC” test to determine whether independent contractors should be treated as employees with various exceptions.  Effective January 1, 2020 under the “ABC” test, workers are presumed to be employees unless they satisfy three conditions:

1. The worker is free from the employer’s control and direction in connection with the work performed, both under the contract and in fact;
2. The work performed is outside the usual course of the employer’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Under AB 5, certain occupations were excluded from the ABC test, including doctors, lawyers, dentists, licensed insurance agents, accountants, architects and engineers, private investigators, real estate agents, and hairstylists.

Since the enactment of AB 5, the California Legislature introduced subsequent legislation (AB 257) to allow more workers to be treated as independent contractors by increasing the availability of exemptions to the ABC test as follows:

• Translators, appraisers, home inspectors and registered foresters.
• For the entertainment industry to include recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians, vocalists, music album photographers, independent radio promoters, and certain publicists.
• For referral agencies to include consulting, youth sports coaching, caddying, wedding and event planning, and interpreting services.

Lastly, in November 2020, California voters passed Proposition 22 which allows workers in the gig economy that serve as app-based drivers to be treated as independent contractors.

IRS implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K

If you are using payment apps like PayPal, Venmo, Square, and other third-party electronic payment networks to for clients paying for your services, payment app providers will have to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year. The reporting form to use is a Form 1099-K.  A business transaction is defined as payment for a good or service.

Prior to 2024, app providers only had to send the IRS a Form 1099-K if an individual account had at least 200 business transactions in a year and if those transactions combined resulted in gross payments of at least $20,000.  Form 1099-K is used to report certain payments that you received for selling goods or providing services, not making purchases.

The expansion of the reporting rule is the result of a provision in the American Rescue Plan, which was signed into law in 2021 but the implementation by IRS has been delayed to calendar year 2024. The IRS is looking to use this information to uncover unreported income and recover lost tax revenues.

Four tips you should know about how the gig economy might affect your taxes:

1. The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

2. Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 57.5 cents per mile for the first 6 months of 2022 and 62.5 cents for the last 6 months of 2022. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

3. You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will lose out on a lot of deductions and pay a lot more in taxes.

4. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments for the 2023 tax year are due on April 18, 2023, June 15, 2023, September 15, 2023 and January 15, 2024. Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

If you are a freelancer and the payor of your services is not complying with the Freelance Worker Protection Act, you should contact legal counsel to protect your rights and insure payment.  Also, keep in mind that as the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in freelancers and independent contractors who earn money from their services no matter where they are located. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you need help filing the 1099-K form, taxes, or are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling legal and tax matters for freelancers and independent contractors and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.