t’s a difficult time for California’s business owners, particularly those in Orange County. Improving our economic health should begin by protecting the smallest and most endangered enterprises in our community, specifically “nonemployer” or freelance firms, which are 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 and buoy the active labor market while providing a valuable springboard for future employers.
Today, more than 21 million freelance firms exist throughout the U.S. Most are in metropolitan areas with creative, high-skilled residents, like OC.
Based on the most recent figures from the Internal Revenue Service, more than 255,000 freelance firms operate in the county. The sheer size of the local freelance workforce is only outmatched by its contributions to the regional economy, which in 2007 was an impressive $15.5 billion in combined sales, gross receipts and other income.
Though freelancing is a profitable profession for many, it comes at a heavy price, as 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, politicians in Sacramento are now pushing for a back-door “freelancer tax” that will 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. 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.
Last year, legislation was advanced at the state Capitol that 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 Gov. Arnold Schwarzenegger as a “job killer,” the freelancer tax is far from dead. A senior state lawmaker 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. But it would deal a devastating blow to OC’s 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 region’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, local elected officials should consider highlighting the challenges of freelancers, and advance targeted regulatory relief to their benefit.
Easing restrictions, such as home-based commercial shipping rules, and passing business tax exemptions for first-time freelancers would be a start.
With some 161,000 unemployed workers throughout the county, government officials 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.
Vasquez is the senior policy analyst at the National University System Institute for Policy Research, an economic think tank in San Diego.
