2020 Updated Tax Laws for California
With the beginning of a new decade, California businesses will see many changes to tax laws. So what can you expect?
AB 5: Independent Contractor ABC Test
AB 5 codifies the “ABC” test which classifies workers as either employees or independent contractors under the California Wage Orders. As of January 1, 2020, a worker must meet all three requirements put out in the ABC test in order to be categorized as an independent contractor.
(A) That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(B) The worker performs work that is outside the usual course of the hiring entity’s business; and
(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Even under a previous, looser standard, state officials estimated misclassification was costing California some $7 billion a year in payroll taxes. Companies also avoid paying federal Social Security and Medicare taxes for contractors.
Minimum Wage and Minimum Salary Increased
Since January 1, 2020, the California state minimum wage has increased to $12/hr for employers with 25 or fewer employees and $13/hr for employers with 26 or more.
Along with the increased state minimum wage, the minimum annual salary permitted in California will increase to $49,920 for employers with 25 or fewer employees and $54,080 annually for employers with 26 or more.
In addition, cities within California have their respective minimum wage increases; for example, Los Angeles, Pasadena, and Malibu have increased their minimum wage to $14.25/hour.
The SECURE Act: Retirement Planning
The first retirement legislation in a decade includes provisions affecting individuals and businesses. The SECURE Act will have a significant impact on family, estate, and retirement planning across the board.
The SECURE Act raises the age at which IRA owners must begin to take distributions from age 70.5 to age 72. It also removes the age restriction on IRA contributions, so investors can contribute and receive a corresponding deduction at any age. To benefit families, the SECURE Act permits, up to a dollar limit, tax and penalty-free distributions from Sec. 529 plans and retirement plans to repay student loans and pay for the birth or a
doption of a child.
In addition to its impact on individuals and families, the SECURE Act contains two provisions that make it easier for small businesses to offer retirement plans to their employees. One change eliminates the so-called "bad apple rule" that tainted the tax benefits of multiple employer plans. Another change increases the maximum annual credit for retirement plan start-up costs from $500 to $5,000.
Should you have any questions regarding these or other tax issues, please contact our tax professionals today.