Tom: You are here this morning to talk about the growth of freelancing, correct?
Mellody: I am, Tom. One of the huge stories that has emerged in the wake of the great recession is the so-called gig economy. Fueled by our ability to connect through technology and the changing labor market, this marketplace of jobs that exist outside the office setting has exploded. The New York Times notes that over 15% of Americans are freelancers, and Time Magazine estimates that nearly 45% of Americans have participated in the gig economy at some point!
But as with any disruption in the labor force, new issues are bubbling to the surface as the lines between the traditional employer-employee relationships and these new roles get blurred. We have seen Uber and its drivers go to battle lately, as the company fights to ensure that its drivers remain contractors rather than employees. This morning, I want to talk about this issues from the employee perspective to make sure our listeners have the full story when it comes to the freelance economy.
Tom: Great. To start, give us an idea of why this economy emerged so rapidly.
Mellody: As I mentioned, technology has played a key role facilitating the growth of freelancing, allowing people to connect and find opportunities easily, and to work remotely. But it has also been driven from the employer side, as companies push the limits of freelancing. For companies, it is all about the benefits. If legally allowed, many businesses would hire their workers as independent contractors, because they could avoid paying for costly fringe benefits – health insurance, retirement and leave – as well as the employer’s share of payroll taxes. Hiring workers as contractors also lessens their legal responsibility and their liability. These are the two drivers of this trend.
Tom: what is the difference between an employee and a contractor?
Mellody: It can get a little complicated, but the two key factors are whether the worker offers their services to the general public, and whether the employer has control over the worker’s methods and time. If the employer determines when, where and how you work, sets employee hours, provides the equipment necessary, and pays the worker by the hour, week or month, and can fire the worker at will, then the worker would generally be classified as an employee.
On the other hand, a worker is usually classified as a contractor if they work on their own premises, are paid by the job or by commission with the risk of profit or loss, can work for multiple customers at any given time, and offer their services to the general public. Additionally, when under contract, then the independent contractor cannot be terminated at-will.
Tom: If we are considering contract work, what should we keep in mind?
Mellody: Well tom, the first thing to remember is that you have rights. The tax code does not permit treating common-law employees as independent contractors, so if your employer determines when, where and how you work, sets employee hours, and can fire you, you should not be considered a contractor. Many employers will try to require workers to sign a contract saying that they are indeed independent contractors. However, a contract cannot make an employee an independent contractor, since contractual terms cannot be enforced if they are illegal.
Tom: What about financial considerations for freelance work?
Mellody: A very important question. There are three big considerations for freelance workers when it comes to your money. The first is taxes. Regardless of whether you work for yourself full-time, or you are just picking up some extra work on the side, you need to deduct taxes four times a year, setting enough aside to cover self–employment tax for social security and medicare, as well as federal income tax, and state taxes if necessary. The second thing to remember is healthcare coverage.
If you are covered by a spouse, or you have coverage through your full-time job, you need not worry. But if you are trying to make the transition to freelancing full-time, you have to consider the cost of healthcare, because it is something you must have for your physical health and your financial health. Finally, you have to keep saving. Emergency funds and retirement savings are even more important when you are working for yourself, because you won’t always have a guaranteed cash flow.
Tom: Thanks for joining us, Mellody. This is a really important topic for everyone.
Mellody: It really is. Have a great week, Tom.