The share of “non-traditional workers” in our labor force – such as independent contractors and freelancers – has been growing faster than any other type of worker.
The new tax code is likely to accelerate this trend, thanks to the big tax break it offers to businesses run by individuals. Independent contractors (or sole proprietors) can now write off 20 percent of their business income in many cases.
“This is putting grease on that slide,” said David Weil, former administrator of the Labor Department’s Wage and Hour Division under President Barack Obama and author of “The Fissured Workplace.”
Ceilidh Gao, an attorney at the National Employment Law Center, said she expects employers to try to advertise the new tax benefits of being an independent contractor to potential or current employees.
“It saves employers money,” Gao said. “They’re able to shift costs on to the worker.”
Indeed, benefits account for more than 30 percent of an employee’s cost to his or her employer, according to the Department of Labor. These benefits generally are not offered to independent contractors.
For some people, the conversion from employee to independent contractor could be worthwhile, particularly for those in a high tax bracket, said Howard Gleckman, a senior fellow with the Tax Policy Center. Then there are people who have no choice but to be an independent contractor.
In addition, baked into the the new code is yet another incentive for employees to, well, not be employees: Certain employee deductions are gone , while business write-offs remain.
Of course, many people are not offered some benefits, despite being an employee. Plus, a growing number of individuals prefer the freedom and flexibility that comes with being self-employed.
“The nine-to-five world was created in the times when you served a company. It used to be that people said ‘I’m so proud that I work for,’ fill in the blank,” said Miguel Centeno of Shared Economy CPA, a firm that specializes in taxpayers who are independent contractors. “Now there’s more of a focus on how we work as individuals.”
In any case, employees would be wise to pause before they surrender their employee status in pursuit of the new tax break, Weil said.
“My concern is that they don’t know what they’re losing,” he said. “It’s really a sweeping set of safety net and discrimination protections.”
Here’s a list of some of those things you’d lose (and might have to pay for yourself) as an independent contractor.
Health insurance
“If you’re now a sole proprietor, you’re no longer going to get employer-sponsored health insurance,” Gleckman said.
On average, employees pay 18 percent of their health insurance premiums, according to the Kaiser Family Foundation.
The average annual premium for single health insurance in 2017 was $6,690, they found, with the worker paying $1,213. An independent contractor would have to pick up that additional $5,477 a year — although the cost of those premiums may be deductible.
Social Security and Medicare tax
Employers pay half of their workers’ self-employment taxes, which is about 15 percent of your income to cover Social Security and Medicare.
An independent contractor would need to bear the full burden of that tax, therefore paying around 7 percent more in taxes than regular employees. (You can deduct that employer-equivalent portion at tax time.)
Here’s one way to think about it: That 20 percent deduction in the tax code could be worth as little as 12.5 percent, if you were shedding your employee label to qualify as an independent contractor.
“It’s a big hit,” said Centeno of Shared Economy CPA.
Sick and vacation days
A great share of full-time employees get paid vacation at about 10 to 14 days per year, and more than 70 percent of workers are offered a fixed number of paid sick days a year.
In addition, a number of companies and states have started offering paid family leave.
That trifecta represents more protections unavailable to independent contractors.
“You don’t work, you don’t get paid,” Gleckman said.
Unemployment insurance
This insurance offers workers who’ve lost their job “through no fault of their own” compensation for a set period. Although the number of people filing for unemployment is the lowest it’s been since the 1970s, around 224,500 people a week are still doing so.
It’s independent contractors who often most need this security, Gleckman said — but they don’t qualify.
“It’s pretty easy to get rid of an independent contractor,” he said. “Much easier than an employee.”
Workers compensation
These laws protect people who are injured while they’re working.
“You lose a limb — you get money from that limb,” said Kate Bronfenbrenner, director of labor education research at Cornell University. “If you lose your life and it’s work related, then your family gets money.”
People who are self-employed don’t qualify, although they can buy their own workers compensation insurance on the private market or through their state (some states require that you buy it through the state government). Rates are around $1.32 per $100 per pay period.
Fair Labor Standards Act
This law establishes that employees are guaranteed to a minimum wage and overtime pay. That protection doesn’t extend to independent contractors.
One government expert found that a construction worker made around $11,000 a year after taxes as an independent contractor. But that same worker made close to $22,000 after taxes if he was classified as an employee.
Before people become self-employed, Centeno said, they must make sure their business will bring in enough money.
“Knowing what your net profit is after taxes and comparing that to your lifestyle is going to be critical,” he said.
Anti-discrimination protections (including sexual harassment)
The Equal Employment Opportunity Commission (EEOC) prohibits an employer to discriminate against an employee — through firing, assignments pay and more — based on a worker’s gender, disability, religion or for a host of other reasons.
Independent contractors often have no way to prove or fight against their discrimination , Bronfenbrenner said. The current climate around sexual harassment, she added, underscores the need for these protections.
“It is even more important women have the protection at this time when they’re feeling the courage to come forward,” she said.
…And more
Other potential losses of becoming an independent contractor include the inability to join a union and no matching contributions to your 401(k) retirement savings.
Bronfenbrenner worries the new tax code will have employees rushing for the exits now, and then realizing the consequences later.
“Fewer workers are going to have secure and stable jobs,” she said.
