If you do a bunch of 1099 work and live in the Los Angeles area, these few notes might help you out.
If you’re not aware, the City of LA has decided that those who work as independent contractors in the Los Angeles area and receive IRS Form 1099 at the end of the year should be paying tax to the City of LA. Their argument (not much of an argument, since you can’t really argue back) is that people receiving 1099s are operating businesses, and they are actively checking your federal and local tax statements to see if you are receiving 1099 income. If you do 1099 work and haven’t been paying City of LA tax, this means that it’s likely that they’ll eventually find you.
What’s making it harder for a lot of people is that the City has not been very diligent about this, so as they find you, they will send you a letter saying that you have to pay all taxes due for the last seven years (the statute of limitations, I would assume). So if you didn’t know that you were supposed to pay this tax, they’ll hit you for it all at once.
Now for corporations and even small businesses, I understand this, but this also affects a lot of actors, singers and artists of all sorts who frankly don’t make a lot of money. And you can imagine, getting a bill for taxes for the last 7 years doesn’t make things easier.
So I’m writing this to help those of you who are affected by this, because the other problem is that they don’t really tell you much, and these things below could make a huge difference in how much you pay and how you handle this in the future. Hopefully this will help. Here’s the pointers:
1) Know that this tax is on GROSS receipts. Which I think is really, really terrible because all other business taxes are based on NET INCOME. In other words, if you received $10,000 in 1099 income, and had $5,000 of expenses, your federal tax (assuming you claimed the appropriate deductions), would be based on $10,000 – $5,000, or $5,000. The City of LA doesn’t care about your expenses, it taxes you on the full $10,000.
2) The rate varies by category / type of business, and the type of business affects your City of LA tax rate. For example, if you are an actor or consultant, you are considered a service. If you are a producer as I am (the criteria being that you are given a budget and have to decide how spend it, and so you are at risk), then you are taxed at a different rate. I was surprised to find that the tax rate for actors is higher than the tax rate for producers. I guess there’s no break for artists in that sense. If you aren’t sure, I would suggest that you go in, ask what categories you would be in, what the definitions are, and then go home and organize your receipts. When you go in, you might get someone helpful that will tell you the ins and outs. But you can also go in and get someone who just asks you a bunch of questions and then tells you “you’re in this category” (in other words, they aren’t going to help you decide, they’re going to decide for you and try to stop you from having any discretion).
3) In previous years, there was a minimum tax. So for example, no matter how much you made, even if you made $1,000 in acting, you might have to pay something like $130. Apparently, there is no longer a minimum, and there has been an exemption for artists, but if you didn’t know that and you have to pay taxes for the last 7 years, you’re gonna get a substantial bill.
4) As mentioned, there has been an exemption for artists (http://www.lacity.org/finance/finA5a.htm) and small businesses under a certain revenue level. The unfortunate thing is that had I known, i could have requested the exemption and ended up not paying any tax at all because my income fell below the income requirement. The thing is, I didn’t know, so I had to pay taxes for the last 7 years when I could have avoided them entirely (Ouch!). There may be an exemption in future years, but they don’t know that yet. They won’t know until the end of the year, or the beginning of next year, so you have to go in and check. Also, the exemption has to be filed by a certain date, I think somewhere around mid- to late-February. Otherwise, you’ll have to pay the required tax.
5) The tax only applies to work done in the City of LA. So if you’re working in Michigan, the City tax doesn’t apply. Someone told me this, but most of my 1099 work is in the LA area, so I figured I had to pay the whole tax on everything. It turns out that you only pay 100% if you are in the CITY OF LA. If for example, you are working in Santa Monica, then you only need to report 20% of the revenue. So if I make $10,000 in Santa Monica, I only need to report $2,000 for City of LA tax purposes, and I only pay tax on the $2,000. Big difference, huh? Guess what, I only found this out after I went in for the THIRD time AFTER I HAD PAID 7 YEARS OF TAXES. Yes, I found out too late (can you tell this was a very painful experience?). By the way, they will give you a list of cities and their zip codes for which you would have to report the full 100% IF YOU ASK.
6) There was a tax amnesty this year, so if you had paid your taxes before a certain date this year (i think it was around June or so), any penalities would have been waived. I don’t know if they will have such an amnesty in the future, but if they do, be sure to take advantage of it, the penalties are sizeable.
7) This brings up another point. When you pay past taxes (for the last 7 years), keep in mind that you have to pay PRINCIPAL, INTEREST AND PENALTIES. Believe you me, it adds up.
8) Know also that it’s your responsibility to know all this and even if they’ve never notified you, that doesn’t matter. So if you haven’t been paying the City of LA tax and you get this letter, “I didn’t know and no one told me” is not an excuse. You’ll have to pay for the last 7 years, and of course, in future years, or file for any exemptions. For more info, you can go here: http://www.lacity.org/finance/
By the way, I’ve had an accountant for the last ten years at least and he’s never mentioned anything about city tax, or even that it was necessary. Just to re-enforce the point, the city didn’t tell me, my accountant didn’t and at best, I only heard stories about it. Even then, there wasn’t much detail to be found that would have helped.
9) Lastly, and a bit of good news, the local tax should be deductible on your federal income tax form. It’s considered a business expense if you are itemizing deductions on your Schedule C. If you hit your AMT (alternative minimum tax), it’s possible that some local taxes will be disallowed. For artists, this is unlikely, more likely for any independent contractors on the more “corporate side”.
Finally, a disclaimer. What I’ve written above I believe to be accurate, but it is based on my experiences, and I make no representations, warranties or guarantees that the points above are accurate or represent current law. The notes above are just suggestions about what to look for, but do your own research, find your own counsel, and you alone are responsible for the decisions you make in this matter.
Sad that such a disclaimer is necessary, but such is life. In any case, I do hope this helps and that it saves some poor artist somewhere some heartache (and cash!).