(Edited for the sake of brevity on 11/22/08 - Thank you Bill!)
Fellow freelancers, I'd like to share with you a concern that has already impacted the freelance community and how we do business. I'm referring to the current trend by large agencies and the IRS to reclassify all freelancers (independent contractors) as "temp" or statutory employees.
The trend to reclassify freelancers as temp employees began several years ago presumably to meet certain IRS guidelines. To date almost all of the large promotional marketing agencies in the area have adopted this policy, and now issue W-2s instead of 1099s. A few agencies side step this by requiring freelancers to work through a placement agency who also hire you as a temp employee and issue W-2s.
Smaller agencies have not adopted this policy yet, and still issue 1099s.
However, now that the large agencies are classifying freelancers as temp employees I have to wonder how long it will take for all of the smaller agencies to follow suit. Since the big agencies are protecting themselves from the IRS, I can't imagine that it will take long before smaller agencies start taking the same precautions.
As an employer, hiring a temp employee is a pretty sweet deal. Temp employees are paid a fixed hourly rate and their hours are limited. Other than paying half of Social Security (a mere pittance comparatively speaking) employers don't have to pay any benefits, or contribute anything towards a temp's retirement plan. Employers also don't have to worry about paying for any sick days, vacation days, personal days or holidays. Other little things like not having to provide adequate work space, a phone line, business cards or up-to-date computers provide even more savings for the employer.
For individuals classified as a temp employee the deal isn't so sweet. If an agency issues you a W-2 then you can not write off mileage while working at that agency. If you only work for agencies who issue W-2(s) then technically you can not write off ANY deductions for that year because by IRS definition you are an employee, not an independent contractor. You also can't contribute any income earned via a W-2 into a SEPP IRA. When you receive a W-2, you are taxed on 100% of your income. When you receive a 1099 you are only taxed on the remainder of income that hasn't been contributed into a SEPP IRA (tax shelter), and deducted as a business expense.
The difference between a 1099 and W-2 could represent well over $20,000 in taxable income annually! And this, in turn, could represent thousands of dollars in lost revenue. While it is true that companies who issue W-2s pay for half of your Social Security, that "benefit" doesn't even come close to offsetting the loss you take when you can't contribute to a SEPP IRA, or take advantage of business expenses. Don't forget that your health benefits are 100% tax deductible too.
Obviously, the temp employee status is a lose-lose scenario for each and every one of us. And I think it's safe to say that the heyday of freelancing has come to an end. So, what's a freelancer, er... "temp employee" to do? Well, it doesn't seem like there are many options available.
1) Take a staff position - if you can find one.
2) Try to find as much work as possible at smaller agencies who still issue a 1099. Of course, the downside here is less work, smaller budgets and having to wait several months to get paid.
3) Continue working as a temp employee with all the restrictions that come with that classification.
4) Change occupations.
I do know that if the current trend to reclassify freelancers to temp employees continues with the smaller agencies then we'll all have one less option to consider.
You can find more info here:
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
http://en.wikipedia.org/wiki/Independent_contractor
http://en.wikipedia.org/wiki/Permatemp
http://www.contingentlaw.com/
If anyone has any thoughts, solutions or ideas regarding this situation I'd sure like to hear them.
Thanks,
Slim
Thanks for creating this blog, Slim. Your insights are always worth reading!
ReplyDeleteAs a freelancer myself, I can't stress how important this is: DO NOT LOWER YOUR RATES, FELLOW FREELANCERS. Let companies decide how to allocate budgets. This age-old trap starts a slippery slope... soon, your "one time only" discount rate BECOMES your regular rate at a company. It diminishes all of us. It lowers rates across the board when freelancers start dropping rates by $10 or $20 per hour.
The "economy" will be the rallyng cry for all these companies. While this is true, it will also become a "front" for companies to cut our rates down.
Also, it doesn't benefit you in the end. You have to work 20% to 40% more hours to make up the cost.
I'd rather work less at my normal rate, than "sell out" to get 16 hours of work.
Slim-
ReplyDeleteThis whole situation (temp/freelancer, 1099 vs W2 status) is very puzzling. Mostly, I think, because depending on which company you talk to, no one is ever really clear why they're changing their policies. It's seems more like an excuse than a reason. One agency told me that the reason why they changed over to hiring through an agency was because one long-term freelancer tried to claim short-term disability benefits after getting sick. After that issue, they just figured that getting "temp" employees would cause them less hassle. Huh? What a flimsy explanation. One explanation was,"It's real confusing, but the IRS wants us to do it this. I won't bore you with it." Thanks for clearing that up.
I suppose we should find ourselves a little fortunate that these changes have only just made it out to our industry. In the engineering and aerospace business, contractors have been treated this way for a while now. United Technologies has a policy that if hired on as a contractor, you can work no more than 2 years. You cannot work there again for 6mos, after which you get another year out of them and then NEVER work for another UTC company again. That includes companies like Sikorsky, Pratt & Whitney and the 5 other companies that UTC has under their umbrella.
In the end, I say we hang tight or evolve into something new. What that is, I can't say yet. I do know this though. I think they're still going to need us. Speaking as a woman who left they agency world recently b/c I had no clue how I was going to live that lifestyle and have a family, the situation could go in the other direction. Many creative teams are still very young, filled with the wide-eyed kids fresh from graduation. But 5 years from now when they get married, do the math and realize they never see their family b/c they're working 12 hours a day-- they'll be heading for the exit. And we'll be waiting on the curb to pick up the slack.
"Many creative teams are still very young, filled with the wide-eyed kids fresh from graduation. But 5 years from now when they get married, do the math and realize they never see their family b/c they're working 12 hours a day-- they'll be heading for the exit. And we'll be waiting on the curb to pick up the slack."
ReplyDeleteExcept, there will be another throng of wide-eyed kids fresh from graduation. And they will work cheaper. There always will be.
That's where experience and professionalism wins the day.
Yes, this issue can be quite confusing. And there could be many reasons why this is happening. And if this was only happening at one or two agencies then it wouldn't be that big of a deal. But that's not the case.
ReplyDeleteThe bottom line is that your hourly rate may stay the same (or even increase) as a temp employee. The problem is that you will pay higher - a lot higher taxes as a temp employee than you do as a freelancer because you will no longer be able to take advantages of tax deductions and SEPP IRA retirement plans. The difference could cost you thousands of dollars annually. After doing the math you may find that it is no longer in your best financial interest to continue working as a temp employee - compared to receiving a staff salary.
It is true that freelancers have always been the backbone of this industry. I'm sure that there will always be a need to fill in for staffers on vacation, on maternity leave, or just to lend an extra pair of hands. We're also needed for the experience we possess when the on-staff team, who are 2 months out of college, become overwhelmed. Unfortunately, even though there will always be a demand for our services, we'll be working for less money now than we have in the past.
I'm not sure that there is any solution to this problem. After all, we are at the mercy of the corporations and the IRS here. But remaining complacent about your income shouldn't be an option. I'm hoping that you all take the time to read some of these IRS guidelines, and/or talk to your accountants. Maybe we can come up with something, anything that may be of help.
- Slim
Slim,
ReplyDeleteAs a fellow freelancer I applaud you (golf clap)
for bringing up these issues that effect our income and retirement funds; the current economic situation isn't helping either. I'm now pursuing a full-time position because I've realized I no longer fit the Freelancer profile where I could "ride-out" the slow months on the $ I made earlier in the year. I'm now living month-to-month w/ 2 kids and a stay-home Mommy which isn't easy even with steady freelance work without my taxes being deducted (a la 1099). But with so many hiring freezes and possible lay-offs looming I'm continuing to freelance whenever and wherever I can.