Notes from a Hired Pen: Watch out for tax withholding from out of state clients

Readers!

I know it's been a bit since I checked in, but vacation plus deadlines plus a recent adverse medication reaction (to an eczema drug, bah) have kept me laser focused on work in order to catch up.

But I am recuperating and (mostly) back on track. So I want to talk about an annoying trend I've been seeing: freelance clients withholding local taxes from payments.

I can't quite say what the rational is (though I have a guess, more on that later), but late last year, I got a check from a Pennsylvania-based university client that wasn't the full fee. Using algebra (yes really!) I figured out that they withheld local taxes. That makes no sense. I don't do any work in that state, and I don't file a tax return in that state. And I'm not an employee. They shouldn't be withholding anything. After many emails back and forth with my editor, her assistant, and the accounts payable department, I filed a Withholding Exemption Certificate, stating that I did perform any of the work in the state (I work from my home in New Jersey), and they send me a check for the money they held.

Yesterday in reviewing paperwork for a California-based university, I saw that they are going to withhold 7% of my check for local taxes unless I file that state's Withholding Exemption Certificate saying that, no, I do not perform any work duties in California.

What's the deal? I've worked for this client before so it's either something I missed before that they don't follow, or it's new. I suspect it's related to the state's asinine anti-independent contractor law, which has caused great financial harm to independent contractors there, and lost me a California-based client who would only work with me if I become an employee of an outside agency – just to write a few articles. Yes that's as dumb as it sounds. 

I can't figure out why the Pennsylvania school would do it too except I've been running into a few universities that are trying to misclassify contractors as employees because they're scared that that asinine California law is going to become national law (yes the same one we stopped in New Jersey). I don't want to get too into the weeds on it, but  you can read more on that from this excellent ASJA Q&A on it (do NOT listen to anything that group pretending to be a union for freelancers says. They're insurance brokers, and not your friend).

Another possible reason for this: anti-independent contractor folks like to perpetuate the lie that we don't pay taxes, which is ridiculous. Who am I mailing estimated payments to four times a year? 

Anyway, if you are used to being paid as an employee and get a W2, this might not sound like a big deal. Your employer withholds lots of taxes from your check. But that's the key difference: you work for someone else. We work for ourselves. Freelancers are small businesses – we get paid our contracted fee, and then we figure out the local and federal taxes owed on our end (with the help of an accountant, as I recommend).

I'm not going to let someone who is not my employer hold onto my fee. At least the California school put it in the contract. I was floored that the Pennsylvania school would just keep some of my money and then assume I'd be fine with it. I wasn't even clear on how I'd get that money back other than demanding their fix their mistake (would I have to file a Pennsylvania tax return? And then, if other clients started doing this, one in every state in which they were based? Madness).

So be on the lookout, and if you get a check that's short without explanation, this may be why.

Recent Bylines
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"Chain Reaction: How Midsized Businesses are Responding to Supply Chain Disruption" for Middle Market Growth 
"Preventing a Case of Sour Grapes" for Mines Magazine 
"Autonomous Vehicles Make Inroads – Inside and Outside the Warehouse" for Supply Chain Dive 

What I'm Reading
My book website/blog/revival/whatever you want to call it is rocking and rolling! So here are links to reviews