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.”
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I don't come to AWN very much anymore. I have had enough with the in your face ads. But now, the ads are taking place in the "articles"?
What a bunch of crap. AWN should be ashamed.
to "Apologies to the author of" and "alternatives"
This is NOT a "stop gap", this is calculated way to get the artist to bear the burden of the employment tax. This is enabling more people to start shady business in VFX and take advantage of a young work pool who sees sleeping under their desk while they do what they "love" as a lifestyle. Labor laws go out the window. The trend that they are trying to do is:
1) work artist at a 'flat rate" for 12 hour days (illegal in CA)
2) Illegally hire contract employees as freelancers when they are infact contract employees who work ON premises using the company's equipment and under direct supervision of the staff.
3) FORCE unincorporated contract employees to "sign" with MBO as if they are freelancers, which means that the artist is billed the ADDITIONAL 16% taxes that the EMPLOYER is supposed to pay, PLUS the 5% that MBO takes.
LEGITIMATE companies like Digital Domain, Method, Asylum, Zoic, etc... they pay contractors LEGALLY as W2 employees.. in other words they pay THEIR share of the payroll taxes as they are supposed to. They get contract employees without benefits, so they save like 30% compared to staff, and traditionally rates were higher since they weren't staff and temporarily hired.
Other companies have tried to employ artist as I-9, which is also illegal, and have based their 'business plan" on this practice. The Govt, since its broke, its starting to crack down on these practices, as they should, because it presents an unfair business practice: companies hiring contractors illegally get to underbid companies that hire legally under w2 because the cost of labor is less. What MBO does is attempt to "legitimize" this practice. The govt gets their tax, they don't care that the worker is screwed or the fact that its STILL illegal to have a "freelancer' on your premises for a day and call them a freelancer, let alone for months at a time.
So Legitimate companies loose out in the bidding process because companies, like those mentioned in this article, get to underbid them and drive prices down.. meanwhile a HUGE amount of their labor force are contract employees hired illegally as freelancers and are expected to pay the FULL payroll tax. So instead of a 34% deduction, expect close to 50% deduction with the added 5% from MBO. Canada deducts canadians 45% but that includes healthcare. MBO charges extra for that! ;D MBO will tell you that you can deduct everything now.. but I already have an accountant and I already do that.. I pay him a flat fee come tax time.. WAY less than MBO's 5%.
I cant stress enough how this is changing the economics of bidding on shows and undervaluing the business. Legitimate companies loose out on the bidding process and they either shutter or send more work to Vancouver, while these vfx "boutique shops" that have started to crop up in LA get the "A" list work from the legit companies and force the "A" list contract employees to pay their payroll tax working as 'freelancers". Meanwhile you have young kids entering this business with no knowledge of basic labor laws, living in hostels more than happy to work 50% of the day for free since they work a 16 hour shift at a 'day" rate. There is no reason for this.. there is still money in this business. do not devalue this business.
Apologies to the author of this article - Bora Pena DOES exist. As Borja Pena.
And Geraint - my issue with this article was that it's presented as a clear depiction of the options a freelancer is presented with in this new industry. I think that MBO is providing a very real service that many different freelancers will find helpful. Given the option of incorporating, or not getting paid, this is a great stop-gap until something better can be worked out.
That said, the neglect of the author to even so much as mention the concept of setting up a proper freelance company and running it, as others and myself have done, is a bit confusing. This article is preceded by pop-up ads for MBO and doesn't even take it's time introducing clear options before introducing MBO - it is an ad for MBO and nothing else.
Ummm, you are a dick. Just because someone does not have a Linkedin profile or is not on Facebook does not mean they do not exist. Grow up. If you want to be freelance, start a proper company and run it. You can work as a freelancer that way. You just need to do your stuff properly.
Oh, and grow up.
VFX vendors and design studios are all under pressure from the IRS to work with contractors who are under the proper payroll taxes, and insurances.
Fine.
But what's upsetting to me is that the article fails to mention anything about incorporation.
After hearing MBO's pitch, it made absolutely no sense to me to give MBO 5% of my hard earned money.
Why 5%? Why not a flat fee? They're NOT partners, they're accountants.
Furthermore, a lot of companies such as MBO will tell you they offer great benefits, such as 401k, dental, and disability. But the thing is, if you do a little research on your own, you're completely capable of finding cheaper premiums for these benefit while incorporating.
I'm not saying MBO is a bad company. Some people find that MBO makes their life easier.
But what I AM saying is, MBO is definitely not for everyone. I spend one day a year itemizing all of my deductibles, and filing my taxes, and from a financial and business standpoint, I would save A LOT more money spending one day out of the year doing a little bit of tax work, and working with my accountant than with MBO, because I know my accountant is working for me, and no one else.
This is a sad state of affairs, a clear and obvious advertisement for a service that shouldn't be needed and is only accepted by freelancers who haven't been told the whole truth. Like others, I too was forced to sign up for the service MBO was kind enough to provide - at face value, the small percentage they were offering for the services provided seemed great. My paycheck arriving 15% short with no clear indication of why? Nothing short of despicable.
What bothers me most about this article is that Bora Pena doesn't appear to exist. No personal reel website, no LinkedIn account, no Facebook. Either someone was so thrilled with their service from MBO that they felt the need to hide their real identity, or AWN actually made someone up to endorse this sham.
This is the main problem I personally had with MBO. Not one person mentioned the Employer tax, I found out when I received my paycheck. Shady!!
"What they don't say in the article is that MBO also charges you the Employer taxes (including Unemployment taxes)from your fee. If you are a truly a W2 worker, the IRS has said these taxes should be paid by your employer, not you. As a W2 worker, you should never be paying these taxes in the first place."
Following up on my post "I think this is taking" and "The reason why the", check out these definitions of staff contract and freelance:
from VFXwages.com:
"TIME:
Full-Time: An employee that works 40+ hours a week.
Part-Time: An employee that works less than that.
PAY:
Salary: A salaried artist will get an annual, daily, or weekly rate, and does not usually get OT pay. Overtime pay should be factored into the salary already.
Wage: Most artists are paid hourly with a 1.5x OT rate.
EMPLOYMENT TYPE:
Contract: Often don't get benefits, but this is changing. They will be hired for a show or shows, with distinct termination dates.
Staff: Do get benefits (vacation, 401k, etc). They are hired for the company, and will be retained through slow times.
Freelancers are another bunch altogether. A freelancer doesn't get benefits, often works from home, and may work on more than one show at a time. They will usually get a lump sum payment, or maybe a biweekly salary rate, where they will have pay taxes on later. If you are working for a studio IN HOUSE on THEIR EQUIPMENT, you are usually not a freelancer. However, often a freelancer will work a contract with a company. For this website, we categorize those freelancers with contracts as a contractor."
As you can read, contract employees "don't get benefits, but thats changing" mainly because staff employees are being forced to become "contract" employees. The reality is that people in VFX that call themselves "freelance" are indeed "contract" employees because they work on premises, under supervision and on company equipment. They should also follow the CA 8 hour straight time, OT standard which many are not, especially at the companies mentioned in this article. Many work at a "flat rate", often around the clock. This is the "Wake up Artist" part.
Keep in mind, what MBO does is facilitate what is essentially a loop hole: enabling "contract" employees who work on premises, under supervision on company equipment to be labeled at "freelance". That difference in cost: the EMPLOYER contribution to social security, unemployment, etc is passed on to the ARTIST, often approaching a 45% deduction.
Now if you were already a freelancer, working from YOUR business or home on YOUR equipment and you had ALREADY paid your taxes, MBO is a great idea.. because now you have a centralized organization and you have the added benefit of having unemployment insurance. I'm not against MBO and what they do. What I am against is the vfx industry here in the US turning into china where there are no labor laws or anything, and a whole post production economy based on artist working ON PREMISIES with no benefits, no hourly wage AND bearing the burden of the taxes that LEGALY a company with on premises employees should be paying. This makes legit companies have to close down while other companies, like some mentioned in this article, "prosper". There is a reason why there are labor laws, especially in California for this stuff. Again, the "Wake up Artist" part.
Refering to the paragraph
Hmmm..got a few questions?
Sorry everyone,
When I wrote this late at night, it seemed clear to me. Upon reading the paragraph, I didn't clearly articulate myself. I going to make sure I triple check my post next time, and do it at a decent hour.
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