Understanding California AB5: Its Impact on Business Owners and Independent Contractors—and How Mike Habib, EA Can Help

In the ever-evolving landscape of California’s economy, few pieces of legislation have stirred as much debate, confusion, and adaptation as Assembly Bill 5 (AB5). Signed into law by Governor Gavin Newsom in September 2019 and effective as of January 1, 2020, AB5 fundamentally reshaped how businesses classify workers, thrusting business owners and independent contractors into a new reality. Designed to protect workers by ensuring fair wages, benefits, and labor rights, AB5 has nonetheless left many scrambling to comply—or find workarounds. For those navigating this complex law in Los Angeles and beyond, the tax firm of Mike Habib, EA, offers expert guidance to ease the burden. Let’s dive into what AB5 means, how it affects business owners and independent contractors, and how a seasoned tax professional like Mike Habib can be a game-changer.

What Is AB5, and Why Does it Matter?

At its core, AB5 aimed to address the growing gig economy—think Uber drivers, freelance writers, and delivery workers—where companies often classified workers as independent contractors to avoid providing benefits like health insurance, overtime pay, or workers’ compensation. The law codified the California Supreme Court’s 2018 Dynamex decision, which introduced the “ABC test” to determine whether a worker is an employee or an independent contractor. Under this test, a worker is presumed to be an employee unless the hiring entity can prove all three of the following:

1. A (Autonomy): The worker is free from the control and direction of the hiring entity in performing their work, both contractually and in practice.
2. B (Business): The worker performs tasks outside the usual course of the hiring entity’s business.
3. C (Custom): The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work they’re performing.

Fail any one of these prongs, and the worker must be classified as an employee—complete with payroll taxes, benefits, and labor law protections. It’s a high bar, and it’s no surprise that AB5 sent shockwaves through industries reliant on flexible, contractor-based workforces.

For business owners, this means increased costs and compliance headaches. For independent contractors, it’s a mixed bag—some gain employee protections, while others lose the flexibility they cherished. In a bustling hub like Los Angeles, where small businesses and freelancers thrive, the stakes are especially high.

The Ripple Effect on Business Owners

Imagine you’re a small business owner in Los Angeles running a graphic design firm. You’ve relied on a roster of freelance designers to handle overflow projects, appreciating their ability to work on their own terms while keeping your overhead low. Enter AB5. Now, you must evaluate whether these freelancers meet the ABC test. If they’re designing graphics—the heart of your business—they likely fail prong B, meaning you’d need to reclassify them as employees. Suddenly, you’re facing payroll taxes, minimum wage requirements, and the administrative burden of managing a larger staff.

The financial impact can be staggering. Employers must withhold income taxes, contribute to Social Security and Medicare, and provide benefits like paid sick leave and workers’ compensation insurance. A 2020 Los Angeles Times article highlighted how some businesses raised prices to offset these costs, while others restructured entirely—sometimes cutting ties with California-based contractors altogether. For industries like trucking, where owner-operators dominate ports like Long Beach and Los Angeles, AB5 has disrupted supply chains, with companies either absorbing higher costs or rerouting operations to avoid the law’s reach.

Compliance isn’t just about money—it’s about risk. Misclassifying workers can lead to lawsuits, audits, and penalties from state agencies like the Employment Development Department (EDD) or the Franchise Tax Board (FTB). The stakes are even higher in a litigious state like California, where class-action lawsuits over worker misclassification have surged since AB5’s passage. For small business owners already juggling tight margins, this is a daunting prospect.

Independent Contractors: A Double-Edged Sword

For independent contractors, AB5 is a tale of two outcomes. On one hand, it’s a win for those who felt exploited by gig economy giants. Drivers for app-based platforms like Uber and Lyft, for instance, fought for years to gain employee status and the benefits that come with it. AB5 promised to deliver that—until Proposition 22, passed in November 2020, carved out an exemption for app-based drivers, allowing them to remain contractors with some added perks like minimum earnings guarantees. (More on that later.)

On the other hand, many freelancers—photographers, writers, consultants—saw AB5 as a threat to their livelihoods. A musician gigging across Los Angeles venues might now be deemed an employee of each club they play, losing the freedom to set their own rates and schedules. The law’s rigidity, especially prong B, assumes a one-size-fits-all approach that doesn’t always fit the diverse realities of independent work. Preliminary research cited by Gusto suggests self-employment in affected occupations dropped by 10.5% after AB5, with overall employment dipping 4.4%. For those who prized flexibility over stability, this was a bitter pill.

Exemptions and Evolution: AB5’s Twists and Turns

AB5 isn’t a monolith—it’s packed with exemptions and has evolved since its debut. Professions like doctors, lawyers, accountants, and real estate agents dodged the ABC test, falling instead under the more flexible Borello test from a 1989 case, which weighs multiple factors like control and equipment ownership. Assembly Bill 2257, signed in September 2020, expanded these exemptions to include musicians, freelance writers (with limits), and certain business-to-business (B2B) contractors, provided they meet strict criteria—like having a business license and serving other clients.

Then there’s Proposition 22, a ballot measure pushed by gig economy titans like Uber and DoorDash. It reclassified app-based drivers and delivery workers as independent contractors, offering a hybrid model with some benefits but no full employee status. Critics call it a corporate loophole; supporters say it preserves flexibility. Either way, it’s a reminder that AB5’s story is still unfolding, with legal challenges and legislative tweaks keeping everyone on their toes.

Enter Mike Habib, EA: Your Los Angeles Tax Lifeline

Navigating AB5’s maze of rules, exemptions, and tax implications is no small feat—especially in a city like Los Angeles, where small businesses and freelancers are the lifeblood of the economy. That’s where Mike Habib, EA, comes in. Based in Whittier, just a stone’s throw from downtown LA, Mike Habib’s tax firm specializes in helping business owners and independent contractors thrive amid California’s complex regulatory landscape.

For Business Owners: Mike Habib offers a lifeline to those grappling with AB5 compliance. His firm can conduct an independent contractor analysis to determine whether your workers pass the ABC test or qualify for an exemption. If reclassification is inevitable, he’ll guide you through payroll setup, tax withholding, and filings like Form 941 for quarterly employment taxes. Need to appeal an EDD audit or negotiate back taxes? Mike’s expertise as an Enrolled Agent—licensed to represent clients before the IRS and state agencies—ensures you’re not facing the government alone. His clients rave about his ability to negotiate affordable payment plans, turning tax nightmares into manageable solutions.

For Independent Contractors: If AB5 has upended your status, Mike Habib can help you adapt. Whether you’re transitioning to employee status or setting up a sole proprietorship to leverage the B2B exemption, his firm provides bookkeeping, tax planning, and filing services tailored to your needs. He’ll maximize deductions—like home office expenses or mileage—while ensuring compliance with California’s shifting rules. For those hit by Proposition 22 or other carve-outs, Mike offers clarity on how to structure your income and taxes to stay ahead.

Real-World Impact: Take Joe and Deborah V., who praised Mike for resolving their brother’s IRS situation with an Offer in Compromise. Or April S., who found “peace of mind” after Mike negotiated a payment plan for a hefty tax balance. These testimonials underscore his hands-on approach—critical for anyone tangled in AB5’s web. With an A+ Better Business Bureau rating and decades of experience, including stints at Xerox and AEG, Mike brings corporate-level expertise to the small business world.

Looking Ahead: AB5’s Legacy and Your Next Steps

As of April 1, 2025, AB5 remains a lightning rod. Critics like Assembly member Kate Sanchez push for repeal, arguing it stifles entrepreneurship. Supporters say it’s a vital safeguard for workers. Meanwhile, business owners and contractors in Los Angeles must adapt to a reality where compliance is non-negotiable, and the tax implications are profound.

So, what’s your next move? If you’re a business owner, audit your contractor relationships—yesterday. If you’re an independent contractor, reassess your business model and tax strategy. And in either case, don’t go it alone. Mike Habib, EA, stands ready to help, offering free initial consultations at 877-788-2937. From Whittier to Santa Monica, his firm is a beacon for those seeking clarity and relief in the AB5 era. In a state where the rules keep changing, having a trusted tax expert in your corner isn’t just smart—it’s essential.