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New Regulations Will Impact SMBs in 2024

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As if figuring out how to make a decent profit in 2024 won’t be enough to tie your stomach in knots, the federal government has arranged for the New Year to bring a passel of new regulations for Freelancers and small business owners to grapple with. While it’s true that business and labor regulations are created to promote fair, ethical and legal conduct and working conditions, what it takes to comply can sometimes place a burden on Freelancers and small business owners, who may struggle with the required paperwork, the costs of implementation and, always, the threat of penalties for missing a deadline or failing to comply. But cheer up, my friend, because one of the new rules will give you a spoonful of sugar (thank goodness!). Here’s the who, what, when and why of it all, coming your way.

Corporate transparency

As of January 1, 2024, most small businesses will be required to file a Beneficial Ownership Information (BOI) report with the federal government under the Corporate Transparency Act. The act is intended to increase transparency regarding business ownership and help law enforcement officials discourage the use of shell companies for money laundering, terrorism, fraud, or other illegal activities.

Under the CTA, new and existing businesses that meet the definition of a reporting company must file a BOI Report with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). The report provides information about the identities of the beneficial owners of the business, that is, those who directly or indirectly exercise significant control over the business or own 25% or more of the business. Entities formed on or after January 1, 2024, must also provide “company applicant information” about individuals who file business formation or registration paperwork and will have until January 1, 2025 to file the initial beneficial ownership.

Unless your entity is exempt, all corporations, limited liability companies and other reporting companies must provide the Treasury Department (FinCEN) with info about the beneficial owners, meaning, a list of those who either own or control the company. New businesses are also required to provide info about who prepared and filed the business formation documents. Reporting companies could face civil and criminal penalties if they don’t file the report. While the CTA may seem as if it applies to big corporations, the rule primarily impacts small businesses, including LLCs and S Corps with just one or two owners.

Domestic reporting companies are corporations, LLCs, limited partnerships and other business entities created by filing documents with the secretary of state or similar office, or with a Native American tribe. Foreign reporting companies are businesses formed in a foreign country that have registered to do business in any U.S. state or Native American tribe. A sole proprietorship or informal business partnership is not considered a reporting company and will not have any reporting requirements under the CTA. LLCs, corporations and limited partnerships must file beneficial owner information unless they fall within one of the 23 exemptions listed in the act. Most exemptions apply to larger companies and specific regulated industries, so small businesses and Freelancers who operate as a C Corp, S Corp, LLC, or limited partnership will likely need to file a BOI Report.

Small business loans

The Consumer Financial Protection Bureau’s Small Business Lending Rule would require affiliated financial institutions to collect and report data on small business loan applications, including applications from minority-owned and women-owned small businesses. The rule would also create the first comprehensive database of small business credit applications in the United States.

The goal is to create a database similar to what the mortgage industry has. Per the Home Mortgage Disclosure Act of 1975, banks collect data from residential mortgage applicants that includes geography, race, whether or not the loan was approved and at what interest rate. HMDA data is used by regulators and the public to look for possible signs of mortgage lenders discriminating against borrowers (redlining).

It’s often difficult for small businesses to obtain a loan because there may be scant profit made or an insufficient track record to assure banks of the owner’s ability to repay the loan on schedule. Women and minority-owned businesses especially find it difficult to obtain loans to grow their ventures. To encourage more transparency and equity around business loans, the CFPB in 2023 said it would require banks to begin reporting the demographics and income of small business loan applicants in 2024.

In rebuttal, some small business advocacy organizations claim that CFPB requirements will slow down the loan process and make it still more difficult for small businesses to obtain loans, not easier. Karen Kerrigan, Small Business & Entrepreneurship Council President and CEO, says the proposed regulations will “bury small businesses and financial institutions with costly and time-consuming paperwork, expose small-business borrowers and lenders to increased litigation and privacy risks, drive more small banks out of business and limit competition in the financial lending space”.

On October 26, 2023, the U.S. District Court for the Southern District of Texas issued a nationwide injunction prohibiting the CFPB from implementing or enforcing its Small Business Lending Rule, the CFPB has stayed deadlines for compliance with the small business lending rule for the moment. The U.S. Supreme Court may take up the matter, so those of you in search of a business loan may want to follow this issue.

National Labor Relations Board joint-employer rule

Also in October 2023, the National Labor Relations Board issued a revised joint employer rule, expanding the definition of “joint employer.” This means that two companies that are both responsible for some decisions about employees—such as a franchisor (entity that holds the trademark and grants license to use the corporate name) and franchisee (owner/operator of one or more individual franchise locations)—can both be held liable for unfair labor practices and the rule goes beyond franchises.

Backstory: in 2019, a group of 1,400 McDonald’s workers filed a lawsuit alleging that their employers had violated California Labor Code wage-and-hour regulations by denying them overtime pay and meal and rest breaks and also forced them to work off the clock. Furthermore, the suit alleged that as “joint employers,” both the Haynes Corporation, the franchisee that owned eight locations in Oakland and San Leandro, and the franchisor, McDonald’s, were responsible. Although the employees and Haynes reached a class-wide settlement, the court ruled that McDonald’s was not responsible, since it isn’t involved in “day-to-day operations” of the restaurants, despite them carrying the McDonald’s name. But on October 26, 2023, the NLRB issued a clarification of the joint employer rule, deciding that both franchisors and franchisees can be held liable for unfair labor practices and labor law can no longer insulate corporate franchisors from liability for what goes on at individual franchise locations.

Unions and workers’ groups say the new rule will benefit and help protect workers, but restaurant associations and other small business advocacy groups say it’s unfairly burdensome to owners. The rule was scheduled to go into effect on December 26, 2023 but pending Congressional and legal challenges, the NLRB extended the effective date of the new joint-employer rule to February 26, 2024.

Wages and overtime

Maybe you own a seasonal business and hire minimum wage employees to keep things going during the busy season? If so, you already know that hourly wages are rising and in fact, more than 20 states will have minimum wage increases in 2024, including Nebraska’s minimum wage increase of $1.50 to $12/hour on January 1, 2024, and Rhode Island’s increase of $1 to $14/hour.

There could be still more action on wages coming soon—in August 2023, the Department of Labor proposed a rule that would allow 3.6 million more workers to become eligible to receive overtime pay. The proposed regulation would require employers to pay overtime to salaried workers who are in executive, administrative and professional roles and earn less than $1,059 a week, $55,068 /year, as full-time employees. That annual salary threshold was increased from $35,568.

Karen Kerrigan, President and CEO of the SBE Council (and who also opposed collecting demographic info on small business loan applicants, as discussed above) said she expects that when the final rule is handed down it will face legal challenges, since raising the minimum wage would have a big impact on many businesses. The Labor Department may issue the final rule sometime in 2024. Kerrigan said, “That’s going to have a lot of disruption for small businesses in terms of cost, but also the models they may use in their workplace in terms of career growth models, compensation models, etc.”

$600 online payments reprieve

I’ve saved the best for last! In November 2023, the Internal Revenue Service for the second time delayed activating the requirement that payments of $600 or more for goods and/or services provided by you and sent to you via Third-Party Settlement Organizations, e.g. payment apps like Venmo and Zelle or online marketplaces like Amazon or Etsy, must be reported on IRS Form 1099-K as taxable income. The requirement was scheduled to go live in tax year 2023.

Instead, the IRS has instituted a threshold of $5,000 for tax year 2024 that will introduce a phase-in of what will eventually include the Form 1099-K $600 reporting trigger for TPSO payments received. The IRS in November 2023 said that in tax year 2023, 1099-K reporting will continue to be required only of Freelancers and others who received $20,000 or more in annual gross TPSO payments for 200 or more sales transactions in that year. Beginning in tax year 2024, the TPSO annual gross payments threshold for Form 1099-K reporting will be lowered to $5,000. 

Thanks for reading,

Kim

Update: In response to a suit brought by the National Small Business Association against the Treasury Department, the U.S. Federal District Court for the District of Alabama ruled on March 1, 2024 that the Corporate Transparency Act is unconstitutional. Presiding Judge Liles Burke granted the plaintiffs’ motion for summary judgment and issued a permanent injunction after finding that the CTA “exceed[ed] the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” The ruling was handed down only two months after the CTA went into effect on January 1, 2024 and an appeal by the Biden administration is expected.

Image: © (Getty Images) James Stewart (R), as a caring community activist, points at Lionel Barrymore (L), a “greed is good” style real estate baron and banker, in a scene from It’s a Wonderful Life (1946, produced and directed by Frank Capra).

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Overcoming Income Inequality

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Happy Halloween! Today, we’ll take a look at one of the ultimate Trick or Treat scenarios, the business model known as the Global Economy (the most recent version, that is—trade has been global at least since the glory days of Timbuktu) as well as other factors that will impact your income.  The Global Economy as we know it began about 20 years ago, midwifed by the internet.  There is plenty of evidence to show that the vast majority of the world’s 7.6  billion souls have received only a global Trick, while a fortunate “1% of the 1%” has received a nearly endless supply of economic Treats.  Most of the candy is in the goody bags of the 2,043 billionaires in the world, 233 more than there were in 2016.  In aggregate, they are worth $7.7 trillion USD. (Forbes Magazine, October 2017)

Earning a living isn’t getting any easier for the 99.99%.  In the October 8 and 15, 2017 issues of The New York Times, lengthy articles appeared and told sad tales about blue-collar workers.

From Indiana came the story of skilled factory workers who until recently earned $25/hour.  Those workers have now joined the growing ranks of low-wage and  underemployed workers, in the aftermath of the ball bearing factory’s move to Monterrey, Mexico.

Factory leaders appealed to the Indiana workers to train their Mexican replacements.  Despite significant peer pressure from most of their colleagues a few agreed to do so, primarily to receive the $5000 bonus that was promised to those who cooperated with the transition.  But once the replacements were trained,  factory leaders reneged on the $5000 bonuses.

Workers south of the border are paid less than $6/hour for their skilled labor.  Most of the former ball bearing factory workers in Indiana have secured other employment, but nearly all have seen their wages cut in half.  Financing their housing costs is an issue for many.

From Oslo, Norway, came the story of construction workers whose labor has remade the skyline of that city, capital of a nation that has become wealthy on profits from North Sea oil that was discovered in the 1960s.  Pay for construction workers remains generous, thanks to a strong union, but workers haven’t seen a pay raise in five years or more.  Further, workers from eastern and southern Europe are now being hired by local construction companies and factories at considerably lower wages than Norwegian citizens receive, so that the companies can compete successfully for projects that are put out to bid by national or global firms.

The global economy has caused workers everywhere to get low-balled on wages and benefits, whether we are blue-collar skilled labor or white-collar professionals.  Most companies fear losing a contract to a competitor; their strategy has become to keep internal expenses low, so that project proposals can include not only lower prices for the prospective customer, but also more in-house profit.  To minimize the heft of payroll, which is usually the biggest expense on the P & L statement, companies send jobs off-shore, recruit and hire foreign-born workers who desire a residency visa and are willing to accept a lower salary to obtain one , or clandestinely hire illegal aliens at bargain-basement pay.

Meanwhile, citizens who are employed at well-paying, full-time, benefits paying jobs are loath to complain or quit, because what are the chances of doing better financially at another company? For most, it’s smarter to grin and bear it.  Maybe you can rent out a spare bedroom on Airbnb or drive for Lyft or Uber to make extra money?

Another factor that depresses wages and impedes hiring is what appears to be lingering discrimination against 50% of the population.  Honeybook, a company that provides administrative support to the various specialties that service the special events and conference planning industry, in a 2017 report on the gender pay gap reported that on average, women earn 24% less than men and in the finance and insurance industries, women earn 29% less than their male counterparts.

Female Freelancers in the events and conference planning industry fare even worse. Honeybook analyzed 200,000 of the client invoices they prepare for affiliates from October 2016 – October 2017 and found that women who Freelance earn 32% less than men in the industry.  Female photographers make 40% less than their male counterparts and female event planners make 24% less than their male peers earn.  Regarding annual earnings, 42% of men earn more than $50,000 per year, while only 20% of women are paid at that rate; 20% of men earn at least $80,000 annually, while only 8% of women are able to do so.

Things are even more dismal for women at the top of the self-employment food chain, the venture capital funded start-ups.  The start-up database Crunchbase confirmed that globally, 43,008 venture capital-backed start-up enterprises were founded from 2009 – 1Q2017 and 6,791 (15.8%) of those companies had one or more female founders.

Crunchbase reports that in 2016, start-ups founded by men received a total of $94 billion in seed (angel) investment fundraising, while start-ups that had even one female founder received a total of only $10 billion.  Start-ups with one or more female founders raised 19% of all seed investment rounds, 14% of early-stage venture rounds, 8% of late-stage venture rounds.

Yeah, OK, so do we continue to cry into the champagne, or maybe do something substantive? The Honeybook crew strongly suggests that women (and men) who are Freelancing to negotiate rates and in fact, to come in with a project fee or hourly rate that reflects the quality and value of your work in the marketplace.  This is not exactly easy, however, and requires some courage. No one wants to lose a contract to a competitor, or to be challenged by a prospect.

Regarding negotiation, Freelancers have an advantage over the traditionally employed because fee negotiation is not unusual.  To succeed in a negotiation, it’s necessary to do a bit of research in advance to learn more about the project.  The process is quite simple—talk to your prospect and ask a few basic questions.  If you learn that your work will bring the client a significant ROI, or if a deadline looms, let that be reflected in your project fee or hourly rate.

If the client balks at your pricing, do not lower your fee.  Instead, adjust the scope of the work you’ll do.  If at all possible, avoid allowing a prospect to dictate your pricing terms.  Ask how much has been budgeted for the project and then decide how much work you can afford to perform for the money available.  Address the client’s most urgent needs and make him/her feel good about the value s/he will receive when your superior expertise and work ethic are applied.

Regarding female entrepreneurs, Crunchbase notes that there are now several angel investor networks funded by female investors who welcome women who lead venture capital backed enterprises.  Access to capital when it’s needed is crucial to a start-up venture’s success.  Women helping women is how we can climb the mountain.

Thanks for reading,

Kim

The Fendi sisters (l-r) Alda, Paola, Anna, Carla (who passed in June 2017) and Franca took over the business founded in Rome by their parents Adele and Edoardo in 1925.  Led by Carla, they transformed Fendi into an international brand that is now owned by LVMH.   Photograph: REX (1988)