Re: AB5 goes into effect January 1
Unincorporated sole proprietors qualify for the new 20% deduction on
net income for pass-throughs. That applies only to federal income tax.
Self-employment tax is calculated on 100% of net income.
As I stated in a prior email, businesses avoid working with unincorporated SPs because they are treated as regular employees under the law and that subjects employing companies to employer liability. ICs that form a business entity are treated as a business and the ICs are responsible for their employer liability to themselves.
An incorporated freelancer might be able to hire a lawyer and a CPA to
recognize some income as dividends, but you'd have to earn a lot of
money for that to be worthwhile. Which is to say, it's another tax
dodge available only to the rich.
I never used a lawyer or CPA for my LLC. What makes incorporation in California a problem is that California likes to crush small business. One of the hammers to the knuckles is the state's minimum tax. Some people opt to incorporate in Delaware to avoid California taxes. ICs that want to do business with the state sometimes like to form a California business entity and then get certified as a California Small Business to enjoy a few benefits from certification.
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