AB5: Exemptions and Exceptions to the New Worker Classification Laws
By now you’ve probably heard about the new California law AB5, which essentially requires almost all workers to be reclassified as employees, leaving very few as independent contractors. If this is your first time hearing about it, I have two great resources to get you informed. You can read an earlier blog post I wrote HERE, or download a comprehensive guide and workbook I created for your business HERE.
This law is a big deal for us in the fitness and wellness industries as most instructors, trainers, body workers and staff are paid as independent contractors. This change can be seen from the worker perspective as good and bad, depending on your perspective. While it makes tax season easier, it also forces workers to report their full income, and even ‘lose’ some by withholding of taxes out of their paycheck.
For employers, this is change largely requires that they pay their half of payroll taxes (explained in depth in both the blog and workbook) and creates larger operational expenses. Long story short - by having to pay your workers their full wage AND the corresponding payroll taxes, business will ‘lose’ money from their profits.
DEBUNKING A FEW MYTHS:
I’ve spent the month of January living in this topic, and I’ve heard a few overarching thoughts here that I need to address and debunk:
You CANNOT “ride this out.” This is the new law, and even though corporations are fighting this at the highest level of courts in CA, this won’t be overturned anytime soon. If you do not start to comply with this law, you will be eventually be caught, penalized and required to pay back taxes.
This is not just a California issue. Most states are starting to create stricter guidelines for what workers can be considered an independent contractor. Most are erring on the side of worker’s (employee) rights.
You cannot fly under the radar just because you’re a small business. When the law was passed at the end of 2019, the California government started creating a separate division that would strictly handle enforcement of this law. There will be hundreds of full-time state employees whose sole job it is to check that every business is utilizing formal payroll and withholding payroll taxes. As I stated above, you might not get caught this year, or next, but your chances of skirting this issue forever are slim. Avoid the penalties and excessive back-taxes that might truly bankrupt your business.
EXCEPTIONS AND EXEMPTIONS:
There are two main exceptions/exemptions to this law that apply to the fitness and wellness industries. See if one of these can apply to your business, or you as a worker.
RENTERS are the exception to the AB5 rule because renters are not workers of the business. They are simply renting space to be able to work with their own clients. There is tons of information about Renters in my free AB5 Workbook.
The statutory exemption to the AB5 rule is for “BUSINESS-TO-BUSINESS” contracting relationships. These relationships occur when a business service provider provides a service to a contracting business.
So think about it this way: instead of a studio or company hiring you as an independent contractor, they can hire your business and pay your business (ie you) to perform the services. But in order for this to work, you must have an established LLC, corporation, partnership or sole proprietorship established, and meet all of the criteria.
One thing to know about me - I am a HUGE believer that all fitness and wellness professionals, especially those who work for themselves and not as a full-time employee (with a non-compete) should have some sort of entity to protect themselves, their assets, limit their liability and maximize their tax deductions. While most people see an $800 annual assessment I see so much more in all of those above benefits. (If you’re still not convinced, download this Entity Formation Guide, and see for yourself.)
If you’re a business owner and looking for ways to lawfully work around the AB5 laws, you might want to consider this: those on your staff who get paid through their companies can continue to be paid as a contractor. Those who are paid as individuals should have the option to form an entity and reap the benefits of both being an entity and being paid as a contractor. Those who chose not to will be paid through payroll and appropriate wages will be withheld.
This will both reduce your payroll tax liability, and will help your workers in the long run.
I could on forever about AB5, the debate of independent contractors versus employees, and ways to make these changes work for you and your business. They’re big, interesting topics, and there is no ‘one size fits all’ approach. If you have questions and would like to schedule a call to discuss how these laws apply to your businesses or jobs, feel free to email me or leave a comment below.