The Money Mustache Community
Learning, Sharing, and Teaching => Entrepreneurship => Topic started by: mantzeln on May 01, 2022, 12:04:25 AM
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I've been working as a photographer contracting for several companies for some time now. One of the companies is now requesting that I convert from being a sole proprietor to LLC as California has passed a law in 2019 that would classify me as an employee. It seems that if I am an LLC then the work becomes a b2b transaction no longer subject to the law and the company can continue paying me as a contractor.
I see the upside for my boss if I convert, but I am not seeing any added benefit for myself. Am I mistaken? Here in CA the cost is $800/year for LLC fees in the income range I expect. On top of that I am uncertain if this really is an effective loophole or if I should move on and try to find a company hiring W-2 employees. At a minimum I am considering adjusting my rate to cover the added cost and inconvenience. Anyone able to help me with my perspective on this?
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https://www.dir.ca.gov/dlse/faq_independentcontractor.htm
Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB 5's ABC test is exceptionally strict. Does your client satisfy all three of the above conditions? If not, they have likely been illegally underpaying you for the past 2.5 years. At minimum, they owe you payroll taxes equal to 15.3% more than you agreed on. Depending on the size of the client's organization, they may also owe you benefits or be subject to significant penalties.
There are exceptions for certain industries. Read through the linked faq for details about specific industries where the ABC test may not apply.
Incorporating yourself is a reasonable workaround -- but only if you are "free from the control and direction of the hiring entity." A business that requires all their workers to form LLCs does not magically relieve their legal obligation as an employer. LLCs with a single customer is a obvious red flag (see part 3 of the test).
If you do incorporate, you should absolutely pass the cost of doing so on to your customers.
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Thanks Ditheca. To me it seems that all 3 conditions are not met, however I do see higher pay as a result of being a contractor than the w-2 positions I have seen locally. Thinking I'll negotiate compensation and bite the bullet and go for LLC.
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You should tell the company that you will have to raise your rates to cover the added expenses and work. It won't be much added to an hourly rate (assuming that's how you charge). But be sure to add in the fees, your time to cover annual reports and other expenses, and the cost of an accountant just in case.
Also, make sure your rates already include burdens such as all your fringe, insurance, OH, etc. You're a company too, and the money that your boss'company saves by not having to pay you benefits means that YOUR company has to pick up all of those costs..
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Thanks Ditheca. To me it seems that all 3 conditions are not met, however I do see higher pay as a result of being a contractor than the w-2 positions I have seen locally. Thinking I'll negotiate compensation and bite the bullet and go for LLC.
It isn't all 3 conditions. Any of the three conditions makes you a de facto employee.
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You should tell the company that you will have to raise your rates to cover the added expenses and work.
+1 on this
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Sounds like your boss is intentionally misclassifying you to avoid paying payroll taxes, workers comp, benefits and more. Now they want you to pay even more costs so they can shield their own wallets because as they state; “You should technically be an employee and we’ve been misclassifying you the whole time. Form an LLC so we don’t get in trouble” My suggestion? Stop letting them steal wages from you and start your own company. And I mean for real. Take their business from them. Tell the clients they have been paying a middle man to get you. Spread the word. Stop accepting that garbage. I wish you the best of luck!
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https://www.dir.ca.gov/dlse/faq_independentcontractor.htm
Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB 5's ABC test is exceptionally strict. Does your client satisfy all three of the above conditions? If not, they have likely been illegally underpaying you for the past 2.5 years. At minimum, they owe you payroll taxes equal to 15.3% more than you agreed on. Depending on the size of the client's organization, they may also owe you benefits or be subject to significant penalties.
There are exceptions for certain industries. Read through the linked faq for details about specific industries where the ABC test may not apply.
Incorporating yourself is a reasonable workaround -- but only if you are "free from the control and direction of the hiring entity." A business that requires all their workers to form LLCs does not magically relieve their legal obligation as an employer. LLCs with a single customer is a obvious red flag (see part 3 of the test).
If you do incorporate, you should absolutely pass the cost of doing so on to your customers.
I agree with lots of what's said above. But to be accurate, you're not going to find yourself paying a new 15.3% SE tax. He's already being paying that if he's an independent contractor. The new tax is the $800 per year LLC franchise tax.