Some of you may have heard that the California budget shortfall is estimated at $40.1 billion. Many states are experiencing budget shortfalls due to economic instability. While this writing is primarily about California there is a reason I say “heads up for Independent Contractors everywhere” which I will touch on a little later.

I will do my best not to get into politics here. I simply mean to bring to light, what the current legislature is attempting to do to Independent Contractors and to the general California citizenry.

As reported on December 18, 2008 in a newsletter by Mr. James Liptak, the 2009 President of the California Association of Realtors®, the California legislature is attempting to put a 3% withholding on payments to Independent Contractors.

The current proposal before the legislature is to raise taxes by $9.3 billion and implement budget cuts of $7.3 billion. One proposal being considered is a 3% withholding on payments to independent contractors. A few years ago, a 3% withholding was collected by the escrow companies on non-owner occupied properties with a sales price over $100,000.

The 3% is to be collected at the time it is earned. When you file your state income taxes the following year, the amount you have coming back to you will be returned. What happens to these funds for that period between the time you paid it in and the time you received that portion that was not owed to the state? My thought is that they will be investing the funds and earning interest after all, the independent contractors are handing them all this money, why not make some money using someone else’s funds. It’s a bit like what the banks do. You give them your money when you make deposits into your checking and savings accounts. They invest your money until you need it after having made more in interest than they paid you for keeping it on deposit. Folks, it’s called “float.” Banks do it. Corporations do it and now states will be doing it.

There is a way for you to do it too but that’s writing for another time.

The reason I say that all independent contractors need this heads-up is because if this catches on, you know what’s next. There will be a new law and a new withholding provision coming to your state and they may not stop at 3%.

It seems that if you write proposed legislation the right way it is considered a “shift in taxes” or in some cases increases will be considered “fee increases” and not tax increases. This means that these proposals can pass with only a majority vote not a two-thirds vote.

A few other proposals;

Part of the $9.3 billion in proposals is the quarter cent increase in that part of local taxes given to the state and a half cent increase in the part given to the state from sales taxes.

Beginning in 2009 a proposed 2.5% surcharge on personal income taxes is on the table. I’ll have to look this one up. It doesn’t sound good at all. How do you put a surcharge on taxes already being paid? I thought a surcharge was like a penalty. I need more study on this one.

And here’s a really good one. “Let’s cut the $0.26 per gallon gas tax.” Great news right. Wrong. The rest of the story is: “Let’s replace it with a $0.39 per gallon fee.” When does a tax morph into a fee? When the proposal gets enough votes, majority votes.

The proposed budget plan would eliminate the 26-cents-per-gallon in current gasoline taxes and replaced it with a 39-cents-per-gallon "fee," for a 13-cents-per-gallon net gain. Democrats say a "fee" does not require a two-thirds vote.

The bottom line here is that we Californians feel that we are usually first in many things therefore I am assuming first position here. If that is the case then all you independent contractors need to keep your eyes open and an ear to the ground. That sound you hear may be the California Budget experience coming to a city or state near you. Be prepared.