How To Avoid the City of LA Business Tax
If you’re a freelancer in Los Angeles, here’s your guide to avoid paying thousands in unnecessary taxes.
As if being a freelancer and dealing with a lack of benefits and higher taxes isn’t enough of a pain, you just received a scary letter from the City of Los Angeles letting you know that you owe thousands of dollars in taxes and penalties for a tax you’ve never heard of.
Back when the dotcom bubble was bursting, the City of Los Angeles decided to scrounge up extra revenue by taxing local businesses. This affects all kinds of small businesses from tutoring and painting to writers. Basically anyone who gets a 1099 or files a Schedule C. Yes, even your side hustle.
Staying on top of the City of LA Business Tax
There are two parts to the tax. First, you have to register with the City of Los Angeles as a business. This is a free service and you don’t have to have a formal corporation or partnership to file.
Second, each year, you have to renew the business license and possibly pay city taxes.
There’s good news and there’s bad news.
The bad news is that if you’ve received this notice, there isn’t a ton you can do about it aside from pay.
Since you didn’t know this was a thing, you may be able to convince them to give you a one-time penalty waiver. Apparently the city is trying to be better about granting forgiveness to businesses who are unaware of the tax in the first place.
It remains to be seen how forgiving they’ll become. So it’s better to make sure you have what you need in place.
The good news is that moving forward, you may not have to pay this tax.
Exemptions
There are two exemptions you can use to get out of paying the Los Angeles City Business Tax.
The Small Business Exemption is for small businesses like freelance graphic designers, script readers, tutors, etc. Your business qualifies for the exemption if your gross receipts are below $100k.
Additionally, income earned as a “Creative Artist” for “creative activities” are exempt up to $300k per year. “Creative Artists” includes actors, writers, directors, and musicians. You can see the full list of who is considered a “Creative Artist” in the LA Municipal Code Section 21.29 (b).
How to avoid the City of LA Business Tax
Regardless of if you qualify for either exemption, you will need to register with the city and renew each year.
RIGHT NOW
Register as a business with the City of Los Angeles. This takes a few weeks to process and you want to be ready to go at exemption time.
JANUARY/FEBRUARY EVERY YEAR
Renew your business/file exemption every year. In 2020, between January 1st and March 2nd.
If you do not file the exemption form every year by the deadline, you will be sent a tax bill with penalty fees.
The CYA* Policy
What if I don’t tell the City of Los Angeles that I have a small business or they haven’t figured it out yet?
They probably will figure it out at some point, so it’s better to cover your butt now.
If and when the city does find out, they’ll charge you the tax and penalties for not paying it. They will also charge you for previous years of taxes and additional penalties.
Getting these tax notice letters can be really scary and expensive. Make sure you are staying on top of your necessary annual filings.
As long as you’re qualified for the exemption, you don’t have to worry about the surprise of these taxes.
TL;DR Summary
- If you work as a freelancer in any capacity in Los Angeles and haven’t registered as a business, do so now.
- Renew your business license every year.
- Small Business Exemption = if your gross receipts are under $100k
- Creative Artist Exemption = if you are a “Creative Artist” earning income from “creative activities” with gross receipts under $300k
- You must file for the exemption every year by February 28th or you will be billed for taxes and penalties.
* CYA = Cover Your Ass
Originally published on Reel Cents.
