Sunday, 20 September 2015

The Perils of Freelancing in Los Angeles - The Taxes You Never Knew You Didn't Owe

LA City Hall. Wikimedia
Any animator who lives and works in Los Angeles needs to be aware of  the laws relating to freelancers in the City of LA.  These local rules are not well known and very easy to fall foul of, as I know myself from personal experience.

In a nutshell, if you do any freelance work at all while you live and work in LA, make sure you register with City Hall.  If you don't, scary penalties will follow.  Here's how the system works.

What is this tax all about?
If you live in the USA and you do freelance work of any kind you will generally get paid via a 1099 form, which lets the IRS know that you owe taxes based on the amount you have been paid. This is all perfectly legal and widely known.  But what many LA-based freelancers do not know is that, even if you do just one freelance job a year, you are deemed to be a "business" by the City of Los Angeles, and you must therefore register with them and pay business tax.

How much tax do you have to pay?
Weirdly, none at all.  When the tax was first imposed back in 2001, the City Council created an exemption for "creative artists" with an income of less than $300,000 (which is most of us). Animators count as creative artists so, in theory, you will owe no taxes. So, no need to worry then? Not so fast.

So what's the problem?
The problem is that if you don't register to pay the tax (even though you don't owe any), you still have to pay big penalty fees. The City sets an annual deadline of 28 February by which freelancers must file for an exemption from the tax, every year.

What happens if you miss the deadline?
If you miss the Feb. 28 deadline, you are liable for serious penalties, even if the city later agrees you owed no tax. The late fees are big and scary, and mount up quickly.

I first stumbled across this tax myself in about 2003 when I got a nasty letter from the City of Los Angeles telling me I was an unregistered business and that I owed them a lot of money in back taxes and penalties - and could potentially face criminal prosecution.  Their letter scared the crap out of me.  I wasn't a business; all I had done was some animation teaching at Gnomon in my free evenings - for which I was paid a few hundred dollars via a 1099 form. 

So I rang the City of LA, but they didn't answer the telephone, so I got myself down to City Hall in Hollywood (where I lived) and stood in line for what seemed an eternity to wait for a bureaucrat to take pity on me. Eventually the whole mess was straightened out, with much time wasted, and no money paid. 

The most bizarre part of it was that I had to do this every year that I lived in LA.  Despite owing no taxes, I had to go to City Hall before February 28th each year, register, and pay no tax. When I left LA in 2006 I still had to go back and register in person, which was a serious inconvenience (by this time I lived in London) and, again, pay no tax.  Years later I have finally managed to get the City of LA to stop sending me nasty letters demanding money with menaces. 

How does the City of LA let its citizens know about the tax?
It doesn't bother.  L.A. makes little or no effort to publicize its freelancer tax.

What can LA-based freelancers do to avoid this?
You can't. The only thing you can do is mark your diary for February 1st each year (or thereabouts) and make the journey to city hall, register, waste a morning (for which you won't get paid), and pay no tax.



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