The IRS and the Freelance Dilemma
The IRS and the imaginary sequel to Mel Brooks’ Spaceballs have one thing in common: they’re both in search of more money.
For Brooks, it was just a gag; for the IRS, it’s a mission to plug what the agency sees as a $14 billion annual gap between their estimates of taxes due and what was actually collected – and for a while now they’ve been targeting the nebulous world of the 1099-paid freelancer or independent contractor. That person may be doing the same work as a fulltime employee, but both the freelancer and the company avoid paying upfront income or social security taxes. The IRS had been scrutinizing companies like Microsoft and Federal Express, outfits that made use of so many freelancers on a long-term, open-ended basis it gave birth to the word ‘permalancer.’
In recent months however, the IRS has set its sights on the animation and visual effects industries. (California and New York – states hosting huge amounts of production work – have also become more aggressive in their tax-collecting efforts.) It’s a world where animators and effects artists are nomads, travelling from company to company, coming on board to work on a commercial or a movie before moving onto a new project at the next shop that needs their services.
It might sound exactly like a freelancer’s lifestyle, but the IRS says that’s no longer the case. “The government is putting the burden on the employers – ‘if we believe they should be employees we will bill you’ for their taxes and Social Security payments,” says Gene Zaino, President and CEO of MBO Partners. “The common law test of whether someone is an employee or freelancer basically consists of three elements: behavioral, financial, and the relationship of the parties.
“The behavioral component is if you’re providing the worker with instruction they’re an employee. Financially, if a contractor is paid by the hour or day, they’re an employee, but if they’re paid on deliverables they qualify as a contractor. The toughest aspect is the relationship of the parties: if the freelancer’s work is similar to what employees do, or if their work is critical to the company, as far as the IRS is concerned, they’re an employee.”
The IRS has been turning up the heat – and companies are sweating the possibility of being hit with heavy fines and tax levies (this past September the IRS handed FedEx a whopping $14 million bill); they’re looking for ways to keep the government happy and still be able to use talent on a per-project basis without people constantly jumping on and off their payroll.
Payroll companies that bill a freelancer’s client, then pay the freelancer as if they worked for the payroll company have been around for a while, but MBO has come up with a service for the animation/effects industries – one that not only protects the company from the glare of the IRS, but simplifies the entire financial back-end of doing business with (and as) a freelancer.
“The freelancers are basically employing themselves through us,” explains Gene Zaino, the company’s President and CEO. “Essentially, the artist becomes a division of MBO.” Zaino describes an online-based process where the artist is free to negotiate their rate with the client. After a contract is signed the artist submits a work order to the client for services rendered on an hourly, daily or per-project basis. Once the work order is approved it becomes the basis for the invoice MBO sends to the client for the freelancer’s services. “The bill goes out under MBO’s name and tax ID,” Zaino adds, “but the freelancer can have their name and even their logo on the invoice.”