Freelancers, Employers and IRS Perspectives

November 2019

So, you’ve taken the plunge to work for yourself … or seriously considering entering the gig economy as a freelancer. Whether you’re already immersed full-time or considering a toe-in-the-water approach with a side-hustle, you’ll find it enlightening to know what the landscape looks like … currently, its likely future and where independent contractors stand with the IRS.

You Are Not Alone!

Currently, over 57 million people freelance in the U.S. That number is estimated to surge to more than 86 million by 2027. That works out to 36 percent of the workforce today, rising to 40 percent by the end of next year.

In two separate studies, McKinsey reports that 1 in 6 workers in traditional jobs would like to become a primary independent earner; Deloitte discovered that 64 percent of full-time workers want to do “side-hustles” to make extra money.

Turns out there’s more to the gig economy than what often immediately comes to mind … Uber/Lyft drivers and online sellers. The gig economy offers opportunity in all sorts of contingent work arrangements, for example:

• Freelancers
• Consultants
• Independent contractors and professionals
• Temporary contract workers

And the industries served are unlimited as evidenced by commercial endeavors as varied as:

• Finance
• Agriculture and Forestry
• Transportation
• Education
• Healthcare
• Construction, to name just a few.

Are Freelancers Happy?

By and large, the answer appears to be "YES." Research indicates that only 20 percent of freelancers would prefer full time employment. Notably, about two-thirds say they are doing their preferred type of work. Among the perks claimed by freelancers are working on a variety of more interesting projects coupled with the flexibility of working from home and more quality time with their family.

Freelancing is a Business

OK. With all the foregoing as background, now let’s get down to the practical side of joining, or already being a part of the gig economy.

Let’s start with the new tax law, the Tax Cuts and Jobs Act (TCJA) that became effective on January 1, 2018. Under the new law, there is a distinct benefit enjoyed by freelancers (independent contractors), referred to as the “20% pass-through” tax deduction (also technically known as the Section 199A deduction). In simplest terms, sole proprietors, partnerships and S Corporations may deduct 20 percent of their “qualified business income” from their taxable income … meaning only 80 percent would remain taxable.

Note: Side-hustles count. If you have a side job that treats you as an independent contractor, you’ll want to determine how you may qualify to have a fifth of your income essentially tax-free. Seek guidance from your tax advisor.

This may be a tipping point for some workers who are thinking about, but not yet acted upon, a desire to become freelancers. The tax implications may prove significantly attractive. For couples filing jointly, $315,000 is the cap above which the deduction is phased out. That said, joint filers who approximate that figure could find it to be a compelling option to make the change to independent contractor status. Estimates are that the tax savings could approximate $15,000 per year in this scenario.

Many employers may benefit from this new provision in the tax law as well which may accelerate demand for freelancers … particularly those who are seeking to reduce their payroll costs. Often independent contractors tend to be cheaper, plus payroll taxes that are the employer’s responsibility are passed on to the contingent worker.

Note: The Department of Labor and IRS have increased scrutiny in determining a worker’s status as truly being an independent contractor or must be treated as an employee.

Caution! While the current tax advantages are an important element in deciding to take steps to convert from employee to freelancer, or setting up a side-hustle, remember that freelancing is a business. That means that independent contractors become subject to “game-changers” fully employed people don’t face. Here are just a few considerations:

• Need to pay both the employer and employee portion of federal payroll taxes … an additional tax bite of 15.3 percent!
• Health insurance, retirement funds and other employer provided benefits are forfeited;
• Loss of unemployment insurance;
• No longer covered by workers compensation;
• No predictable, steady income – subject to peaks and valleys of assignments

What to Do … What to Do?

As you may expect, there is much more to the story. As a freelancer, you may be exposed to a world of legal problems that are typically covered by an employer for workers in the permanent career path. Setting yourself up as a limited liability company (LLC) is one way to mitigate legal risks to yourself.

Whether you are operating full-time or as a side-hustle, creating your own LLC separates you from your operating entity. This may help protect your personal assets if your company is sued, has financial difficulties … or worse, closes its doors. Additionally, written agreements with your clients will define the scope of your work and help ensure you’re paid for your efforts.

Note: This article is not intended to be and shall not be construed as legal advice. Always seek advice from your attorney to determine legal issues and their application to your unique circumstances.

Capable counsel from your CPA and attorney will help determine
the best form of business organization for your business.

Summary

Freelancing is on the rise. Increasingly, freelancers are a staple in the American workforce and contributing a significant amount to the U.S. economy. Most freelancers report being happy with their professional lifestyle and the likelihood of expanded opportunities in the state of the market. Some experts claim that if current trends continue, the freelance market may overtake the traditional job economy.

Want to be sure your side-hustle or full-time freelance plan is sound?
We can help. Give Blair + Assoc a call or drop an email. We’ll respond immediately.