Wednesday, February 19, 2020

AB5 - Democrats in the CA Assembly, Senate and Governor's Mansion - What Were You Thinking?

[NOTE: A repeal bill by Assemblyman Kevin Kiley, AB1928, will hit the floor for debate on February 27.  If passed and signed by Governor Newsom, it would immediately suspend the law. It faces stiff uphill opposition by the supermajority, but has wide support at the grassroots.]

A post by Sara Kustiner Pedri, in the Freelancers Against AB5 group by a CPA, illustrates the horror and folly of what has occurred in California with the introduction of AB5. Can't summarize it better than she has. And yes, I am a life-long Democrat. It's unfortunate when "your team" does something terribly autocratic, inflexible, and destructive to the economic engine of independent contractors (of any political stripe), but wrong is wrong, as Markos of Daily Kos also aptly noted. This is a nonpartisan issue. Repeal AB5.

AN OPEN LETTER TO DEMOCRATS IN THE CALIFORNIA STATE ASSEMBLY, SENATE AND GOVERNOR'S MANSION: WHAT WERE YOU THINKING?
Congratulations, California Democrats! You’ve successfully scared the holy bejeezus out of all California companies. Now, let’s talk. 
In Marvel Universe terms, you’re Tony Stark. You tried to do something to protect everyone, but you created Ultron. Now, it’s time for a Vision. 
It’s been 6 weeks since AB5 was signed and put into effect. We’ve now had 6 weeks to see some actual results. So, as a CPA with clients in the Independent Contractor world, and as a lifelong Democrat whose Assemblyperson and Governor actually voted for this shitshow that is AB5, I need to ask: What were you thinking? 
After reading the actual law, listening to interviews, and taking numerous courses on AB5, I simply don’t know what the thought process was behind AB5. What was the goal? Because, if it was to “protect California workers”, you’ve done an abysmal job of that. 
And if the ultimate nefarious goal was to have everyone join a union, then I have to ask: who was the genius who 1) didn’t consider that the result of AB5 would include dog walkers needing a union, and 2) then thought, “Hey, we need to make an exemption for dog walkers now!” Seriously. There is a line item in a California Labor Law that specifically states “dog walkers”? Ok, which one of you legislators has dogs that need walking? Because that’s like Internal Revenue Code laws that take effect on some arbitrary date like May 23, 1976, because some politician or lobbyist somewhere did something on May 22. 
For the most part, the laws were already on the books before AB5. 
a) Some companies were misclassifying workers. True. But the Borello Test was on the books. Catch them; don’t punish everyone for their misdeeds. You’ve increased the EDD funding budget for audits now – you could have done that before. 
b) California has had a law for years that states that companies must cover independent contractors with Workers’ Comp Insurance. Sorry, Senator Warren – I love you, but you’ve got that one wrong. It’s right there on the back of my State Comp Insurance Fund report. Of course, these W/C insurance companies may not have been paying out CLAIMS to independent contractors, but you realize that you should be going after the W/C insurance companies who took premiums but didn’t pay out, right? 
c) If you think these workers will now be covered by health insurance, you’re nuts. These ICs can work 50-100 different gigs in a good year. Did you really think they were going to change their health insurance coverage every time they picked up a new gig? I’ve got news for you. Switching health insurance when going from one long-term employment job to another long-term employment job is hard enough – COBRA, anyone? Employer-provided health insurance is NOT going to happen under AB5. Period. End of discussion. 
d) Minimum wage protection? You must be joking. Some of the professionals caught up in this make $300-1,500 a day. 
The laws were there. You just needed to enforce them. Instead, you took a single legal case, Dynamex (where one single company decided to break the rules and throw all their employees to IC status), and you brought the hammer down. On everyone. You have decided to ruin the livelihoods of 1-2 million true California independent contractors because someone somewhere screwed up on, what, 1,000 classifications? That’s some serious overreaction and, might I add, a rather large amount of California citizens to consider acceptable collateral damage. 
Let’s now talk about the known, proven effects so far. And, yes, they significantly disagree with Assemblywoman Lorena Gonzalez’s reporting. 
I myself, being naïve, was anticipating that my clients would now be receiving W-2s instead of 1099s, which is a huge problem in itself. AB5 has caused so much fear that hiring companies are now refusing to accept a W-9 with the legal name and tax ID of a legitimate LLC / partnership / S-corp / C-corp and are forcing these freelancers to provide a W-4 and go on payroll, even though they fulfill the exemption of Business-to-Business Contractors and the Borello test. 
You see, hiring companies aren’t going to the trouble of figuring out who is who. Everyone has become an employee – even legitimate businesses. These freelancers have operated as true businesses for years with business licenses, workers’ comp insurance for their own subcontractors (if any) as required by law, filing of 1096 and 1099s and DE-542s, paying unsecured business property taxes, etc. They also make large tax-deductible investments in their own equipment, tools, and work spaces. 
Forced to be employees, they now will receive W-2 income rather than Form 1099 income, and they will have no ability to deduct their business expenses related to any W-2 income. If they are Schedule C single-member disregarded entities, the Tax Cuts and Jobs Act of 2017 removed their ability to deduct unreimbursed employee business expenses on Schedule A. As such, their Schedule Cs will begin to run net losses, winding up with seeming Hobby Losses which are disallowed by the IRS and FTB. I can assure you these aren’t hobbies; they are livelihoods. If they are partnerships or S-corps, there will no longer be any Form 1065 or 1120S income, but their tax returns will continue to deduct business expenses, creating ongoing losses. Do you know how many years a Form 1065 or 1120S can issue K-1s with ordinary businesses losses before the IRS starts asking questions? Asking for a friend. 
By the way, with these losses you’ve created, you’ve just removed the TCJA Federal income tax benefit of the Qualified Business Income Deduction, because without net business income, there’s no deduction. 
In other words, AB5 will put these professionals out of business and they will close their LLCs, partnerships, and corporations. And it won’t be because of the expense of payroll taxes. It will be because they can no longer operate the businesses they previously legally established due to not receiving payment/income in the form necessary for proper tax reporting purposes. 
It has turned their income tax and business worlds upside down. 
But I was naïve. AB5 has resulted in far worse than that. 
Instead of switching ICs to employees, many hiring companies have simply cancelled contracts. Period. Done. Work gone. Needless to say, that sound you heard was 1 million independent contractors finding out they no longer have a source of income. 
And who’s getting these jobs? OUT-OF-STATE employees, because, lo and behold, your little AB5 states that California companies who hire out-of-state ICs aren’t affected by AB5. 
So, you’ve successfully 1) forced ICs to move out of state for work, and 2) allowed CA companies to hire out-of-state workers. Brilliant! You just took an entire demographic of mostly Democratic voters and MOVED them out of California! Tell me, who exactly are your political advisors? Because I want to make sure I do NOT hire them. 
And, lastly, as a CPA, you’ve tied my hands. I can’t even assist my clients in attempting to make a proper determination, because I am “jointly and severally” liable for any penalties ($5,000-$15,000 fine PER individual misclassification). Only a member of the bar can advise a business owner about classifying workers as employees or ICs. Guess what? Attorneys are booked up three months out. I guess that benefits you the most, as it’s difficult to find an available attorney to write up a class-action lawsuit against you. 
In summary, let me say that I hate… HATE… giving the GOP any talking points. But, California Democrats, you have brought this on yourselves. Now, fix it!
Good reads...  
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