The Big, Bright, Beautiful Future of Freelancing
Throughout history people have navigated the vocational transitions driven by changing technology, world events, and progress. Such change happens rapidly. Consider just how much has changed in the breadth of a single 40-year career. 40 years ago only a few hobbyists owned a personal computer. There was no such thing as personal cell phones, GPS, electronic car ignition, Prozac, gene sequencing, human footprints on the moon, mp3 digital music, Post-it Notes, Amazon.com, digital photography, karaoke, microwave popcorn, DNA fingerprinting, and about 100,000 other innovations that affect each of us every day.
Every breakthrough above has had a profound impact on career paths new ones were created and existing ones were modified forever. Which brings us to freelancing as a rapidly emerging career path.
Freelancing, the New Normal
Simply put, freelancing describes someone who is self-employed, contracting themselves out to businesses and institutions to independently perform project, assignment, or piecemeal work. Freelancers use their technical and soft skills to augment employers’ workforces without the employer committing to a long-term relationship.
Freelancing became a way of life for tens of millions of talented people displaced by the Great Recession of 2008. According to a 2014 report from eLance, 53 million Americans freelance, up from 16 million in the 2011 study by MBO Partners. Both studies project this number to grow over the next five years.
The trend toward freelancing doesn’t imply the death of the employed worker. It does suggest, however, that freelancing is likely here to stay. Since it is, there are a number of career implications that need to be considered.
Employers’ Views of Freelancers
Employers are attracted to engaging freelancers while at the same time fearful of the consequences of engaging them. It’s important to understand these two views.
1. Understand what makes a freelancer attractive to an employer. Freelancers are not employees, so an employer saves on benefits, taxes, occupancy costs, and other expenses of maintaining an employee workforce. It is less costly for an employer to rent the technical skills and specialist expertise of a freelancer for three months than it is to hire an employee to fill the same position. And the concerns of layoffs, unemployment, and negative employee morale are eliminated with a freelancer.
2. Understand what scares employers about freelancers. The IRS has very specific rules about what constitutes an employee versus an independent contractor (the way many freelancers are classified by the IRS). Incorrectly accounting for a freelancer who is deemed by the IRS as an employee exposes the employer to huge financial risks, not to mention the specter of class-action lawsuits by persons incorrectly classified. Employers that have been taken to court or ruled against in such matters suffer brand erosion in the court of public opinion.
The Compelling Case for Freelancers to Incorporate
Many people who have lost their jobs become freelancers as a way to earn income while searching for their next employer. Most of these sought work as 1099-Independent Contractors. Rather than reflect a gap in employment on their résumé or job application, the period is described as self-employed. For example, Mary Nathan lists various temporary assignments on her résumé, while Tom Hoffman shows his employer as Hoffman & Associates.
Instead of viewing freelancing as temporary independent contractor work, consider incorporating. Freelancers who incorporate become an employee of the new corporation they now own. This strategy offers many benefits, including:/p>
1. It is inexpensive to incorporate. Today’s online do-it-yourself incorporation services cost less than $300 to create a corporation, inclusive of forms and filing fees. I’d recommend consulting with a tax professional about which type of corporation is right for you, something a tax professional will often do in the hopes of landing you as a client should you incorporate. Consider having that tax professional prepare your corporate taxes.
2. Your tax advantages are enormous. The payroll tax taken from employee paychecks is significant to cover federal, state, and local taxes – sometimes totaling one-third or more of income. It is out of this post-tax income an employee pays for numerous job-related expenses which he or she cannot deduct on his or her tax return. Many of these same expenses can be submitted to a corporation and reimbursed with pre-tax dollars. As a corporation owner you can be reimbursed for these common job-related expenses:
a. Daily commuting costs to and from where your work is performed.
b. Office in the home expense, which allows you to deduct a portion of your home or apartment if performing work there.
c. Costs for telecommunications services (such as cell and Internet service) used in performing your work.
d. The same goes for equipment, supplies, materials and a host of other legitimate business expenses.
As a result, most incorporated freelancers net a significantly greater portion of their freelance income, even after the costs of maintaining a corporation are considered. We recommend you consult a tax professional to help you identify all eligible costs.
3. Engaging a corporation relieves the employer of any liability for improper employee/contractor classification. Rather than engaging Sheldon Jackson as an independent contractor and run the risk of the IRS classifying him as an employee, engaging SJ Corporation with Sheldon Jackson performing the work as an employee of SJ Corporation eliminates this concern. Thus incorporation may increase the likelihood of being engaged.
4. Employers usually pay a measurably higher hourly amount to freelancers than to employees for performing the same work. A $25 per hour assignment as an employee could pay as much as twice that to a freelancer, in order to rent his or her expertise for a few months and not incur all the costs of employment.
5. Incorporation can continue even if later employed. A freelancer might accept an offer of employment after performing well as a freelancer. There is no reason to end the corporation if this is the case – in most states a corporation is considered active if it files required returns, with or without any income earned. By continuing the corporation during periods of employment, the owner can opt to perform assignments for his or her corporation on the side if appropriate. The corporation owner still shows continuous employment at his or her corporation, which stands at-the-ready to resume more full-time activity should it be needed.
There are many other benefits for incorporating as a freelancer, as this article from Entrepreneur outlines.
If you find yourself contemplating or performing freelance work, strongly consider incorporating and joining the ranks of business owners. The financial benefits alone make this a compelling choice, and who knows, you might wind up building a tremendous asset that serves you for the rest of your working life.
This blog was excerpted from the 6th Edition of the 450-page textbook that explains over 2,500 job and career-search best practices, and is included with each Job Search Readiness Assessment℠.
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