In the wake of the 2000 elections, with the American public and their houses of government so evenly and deeply divided, people are saying that little will be accomplished in Washington over the next four years. Don’t believe the cynical hype! As independent professionals, we’ve got to make ourselves heard, individually and by the millions, on issues ranging from health care to taxes. Here’s what’s worth fighting for.
Most traditional employees receive their health insurance as a pretax benefit, whether or not they must contribute a substantial portion of the premiums. By contrast, self-employed folks currently can deduct only 60% of their premiums; this write-off is scheduled to rise to 100% by 2003. Would we free agents like to see the 100% deduction moved up to 2001? Sure we would. While we’re at it, Uncle Sam, how about removing the limits on deductions for long-term care and disability insurance premiums?
Another proposal of special interest to free agents is a partial tax credit for health insurance costs for people with low to moderate incomes. This would give courage to professionals who hesitate to go free agent, fearing the double whammy of huge insurance bills and a dip in net income due to startup costs.
While we’re lobbying for these changes, we need to use professional associations to band together for favorable group rates on insurance (see the resources listed below). Another possible way to lower your bill in April: Incorporate or form a partnership. Your business may then be able to deduct premiums for various insurances, which would reduce your income tax bill. Partnering or incorporating can also lower your self-employment tax. Consult with a qualified tax professional.
Whining about taxes dates back to the Stamp Act, but sometimes our complaints are misplaced. Self-employment tax, however odious, presents a good example: When you work for yourself you have to pay both the employee and employer shares of Social Security and Medicare, amounting to a 15.3% tax in 2000. Sure, free agents can whinge and pule over this as double taxation, but as Marcia Yudkin, a marketing consultant from Boston points out: “We don’t have an employer. Who is supposed to pay the other half of our Social Security tax if not ourselves?” My own single-digit savings account balance notwithstanding, I’ve got to agree.
Allowing taxpayers to invest some of their Social Security contributions in stocks and bonds, and reducing or eliminating the inheritance tax, may be causes more worth fighting for. Portage, Wisconsin-based management consultant Elaine Biech frames her frustration with this more controversial levy in words we all can understand: “Individuals like me who have worked hard to build a business and create value should be able to pass it on to family members with less of a penalty.” In my opinion, this tax should be reduced, not eliminated.
Contractor Vs. Employee Status
The IRS doesn’t abide by your personal declaration of independence. They have a test of their own to determine if you’re an independent contractor or an employee. Their guidelines, however, are tangled and often vague. For example, one IRS guideline says that, to the extent that a company that I work for tells me what tools to use, I tend to be an employee. So if my contract with a publisher requires that I submit my freelance writing as a Microsoft Word document, does that make me the publisher’s employee? I don’t think so, but neither I nor my client can be sure — at least not without paying a lawyer to find out.
If this seems arcane, consider the risks: Suppose the IRS comes along and tells you that, although you filed your taxes as a 1099 independent, you’re actually a W-2 employee. Your business deductions could be disallowed, along with your 401(k) contributions. And your employer could be forced to pony up for Social Security and employee benefits.
Corporations protect themselves by either hiring full-time employees when contractors would be cheaper or better suited to the task, or requiring that contractors sign on as employees of a temp agency. In the latter arrangement, the corporation pays the middleman agency to launder their contract workers so that they come out smelling like employees. This may give the corporation some protection against potential claims by workers or the IRS. But the net effect is to shrink the market for contract work; with a middleman involved, these arrangements are more expensive for corporations and less lucrative for workers.
To remedy this situation, Uncle Sam should make clearer and simpler rules for distinguishing independent contractors from employees, and let corporations and free agents fend for themselves in a free marketplace. As Biech puts it, when a company and an individual make an agreement on who pays the taxes, “the government should stay out of it.”
Looking for a way to make your voice heard? Try these links for organizations that may help amplify your opinions. Many of these discipline-specific associations advocate for independent professionals.
American Marketing Association
Association of Independent Accounting Professionals
Graphic Artists Guild
National Writers Union
Public Relations Society of America
These small business advocacy groups serve free agents across the United States.
National Association of Home-Based Businesses
National Federation of Independent Business
Small Business Survival Committee
John Rossheim writes about consulting careers, technology, and travel; he also provides coaching for free agents through rossheim.com.