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.”
Printer-friendly version
The reason why the freelancer's union is cheaper is because its a freelancers union FOR the artist. MBO is for the COMPANIES, not the artist. Before MBO companies had to pay paroll taxes, now its just 2% because the freelancer's pays for payroll.
Artist treat MBO like its something for artist but its not. Its for companies that are basically doing something illegal to cut down overhead. Up in canada, the 40% subsidies to vfx companies are paid for by the employees that work there via their taxes. Here in the US that is slowly happening by forcing the employees to work as freelancers.. and now these companies don't even want to pay for the damn accounting.. so they offset it on the artist... people who couldn't be the farthest from accounting. Companies offsetting cost to govt and the govt offsetting it to the worker.. up in canada its with subsidies, here in the US its with "services" like MBO. Whats next, I have to pay for the 'rental" of the chair I use at the company? its the same thing. I can't wait until companies start to charge the artist for the computers that they use to work on.
read the FAQ for the artist on their page.. it looks like it was written by a VFX recruiter with statements like "While most of our Associates end up falling in love with our program ". They make an emotional reference to their services, not a logical business one. Classic recruiter line.
Wake up people.
I think this is taking advantage of the underemployed folks who are forced to be "freelancers" since companies are now forcing employees to work in such manner. I freelance because I HAVE to not because I want to . Yeah the comments of Bora Pena are really indicative of the new youth in this business: The "libertarian" mindset of wanting their "Freedom" and that if you work full time you are "stuck". Interesting that thee are no comments from seasoned pros in their forties with families and mortgages. See how happy they are as they are forced to pay 45% in taxes as opposed to 30-35%, paying essentially the payroll, social security and unemployment that ALL companies used to have to pay to have employees sitting at the companies desk using the company's equipment. Now companies don't have to because of this clever trick of passing those cost on to the artist in exchange for this "Freedom" that Bora Pena so desires.
Keep in mind, this is MANDITORY to join if you work at certain companies, there is no other business "competing" for your business. There is nothing organized at the artist end to push back. Artist didn't want to organizes so the companies did.. and now they want to pass the cost of "doing business" onto the artist. And since everyone is forced to join this now, MBO get stronger, individual artist become marginalized, and the Govt does nothing, they get their money and thats all they care about. Doesn't matter that you have companies like MBO getting their "vig" mafia style off the worker.
Yes we could definitely use some streamlining being that now the reality of being transient and itinerant workers is a reality for many.. Its just that I don't want the 27 year old Bora Penas of the world driving all of this solely who sees depositing checks in his bank as "intense". His healthcare, cost of living, etc is not representative of the seasoned freelancer who may have a family and mortgage. its literally settling for the lowest common denominator from a standpoint of income and seniority.
Read what they say on their own web page:
"1. Why should I use MBO Partners to better manage my career?
Working through MBO Partners means that you can keep your independence as a freelancer, while protecting the studios you work for from these very real (and very expensive) risks."
Why is it my responsibility to "protect" these studios. If they paid their own payroll taxes then they would be responsible and not be at risk. But instead, the artist pay for this. This is the slow transferring of the cost of running a business to the artist. yes I can see paying for my own healthcare, but now paying for the company's payroll? If i work on their equipment and in their premises, I'm their employee. Period.
3. Why are more studios using companies like MBO Partners?
It is becoming very risky for studios to pay freelancers directly.
Yeah because its ILLEGAL. Now they offset that cost to the artist.
6. What if I want to use MBO Partners with a studio you aren’t already working with?
While we already have arrangements set up with dozens of studios, to set up a new relationship is very easy. Just call or email your Business Manager (your service contact at MBO Partners) and they’ll get them set up for you in the system.
Great, now you can recruit for them, and have everyone pay MBO 5% of their salary just to have a damn job... WAKE UP ARTIST. This isn't "freedom". Its 100 years of labor laws disappearing.
I did some freelance work for a company that signed me up for this. At first I was excited about the services, but then I realized I was paying alot of money for not very much, and I have many unanswered questions.
I wasn't impressed with MBO's benefits. I have a medical plan that suits my needs through Freelancers Union that costs only $285/mo. It's the same plan that MBO offers (Blue Cross Blue Shield) but MBO charges a much higher premium. Freelancers Union also offers 401k, life, disability, and dental insurance. I'm not trying to sell Freelancers Union, just saying that it's a cheaper alternative than MBO. (http://www.freelancersunion.com/benefits/index.html)
The dealbreaker for me was having to pay 5 percent of my earnings to MBO, and having to keep working for MBO in order to remain covered. I couldn't take as much time off as I liked, so it wasn't worth it for me.
I just got my W2 and a huge chunk of my money is missing. Apparently MBO don't report my business expenses as mine because normally I wouldn't be allowed them on a W2. They assured me it was fine, but it seems fishy. If it was really allowed, why don't regular employees just give all their receipts to their workplace and report that they earn less than they do to avoid income tax?
I think I'll still have to hire an accountant to figure this all out.
The general impression I get, is it's to good to be true. I wonder why has never been mentioned by graphic designers a long time ago. When I look at these services my first thought is how can this company afford to provide all these services for such a low cost, numerous businesses have a hard time struggling with these expenses. The more people in the network the more personal is required manage the individual accounts.
I really can't see any company providing an benefits or HR support as a result of these type of companies, a one stop shop. Why should any company the benefits of this model is to great. This service does benefit a worker whom isn't making the same salary as a someone whom is pulling down a larger amount.
How many years have you been with this place? I am guessing there has to be an additional fee to be included in their medical and retirement plan. Is that the case? I wonder how this service handles drastic changes in the industry. For instance when a computer became prevalent in the industry, How does the company help you categories your expenses? Won't you still have to consult a tax attorney when these issues arise?
I was skeptical of MBO when I first heard of them and I had a hard time wrapping my head around what they really did. Let me see if I can make it simple... as an advertising creative guy that's what I do.
First think of MBO as your personal HR department and accounting department.
1. MBO invoices my clients and they collect payments for me. If a client is slow paying, MBO stays on top of them.
2. MBO has master contracts with the employer. I'm not a lawyer and I don't want to hire one to to make sure I'm protected.
3. Independent contractors don't qualify for unemployment. Working through MBO makes an employee so when you're out of work you can qualify for unemployment.
4. Benefits: since working though MBO makes you a W2 employee you can participate in their health insurance program, you get errors and omissions insurance, and you can participate in their IRA program. I was getting my health insurance through the Graphic Artist Guild but the rates went up to $1,600 a month! MBO's plan is competitively priced and it's good coverage. One of my clients wanted me to carry E&O insurance but it was way too expensive but it's included with MBO.
5. Taxes: MBO withholds taxes just like a regular employer. What's good about that is that you don't have to pay quarterly taxes, you don't have to think about it, and you don't spend it and then have to figure out how you're going to pay it when it's due. My accountant didn't actually run both scenarios but his hunch is that I pay less taxes working through MBO than I do as a 1099 worker. He spends less time preparing my taxes and that saves me money.
6. Tax deductions for all medical expenses. I'm don't know how this works but I checked it out with my accountant. The way MBO is structured allows you to deduct all your medical expenses. In most cases you can only deduct the amount that's above 7 1/2% of your income. With MBO you can deduct them all so let's say you make $100,000 (to make this easy)... you could only deduct medical expense beyond $7,500. With MBO, if you had $7,500 in medical expenses and if you're in the 37% tax bracket, that would save you $2,775 in taxes.
7. Tracking business expenses. When you have a business expense, you enter it into your MBO account online and it gets deducted from your taxes.
I was hesitant to have a third party collect my payments but I ran a D&B report on MBO and found that they've been around for a very long time. Plus they work closely with the IRS and even have contracts with the government.
I was glad to see MBO began a program for visual effects people and animators. I've worked with companies like Rhythm and Hues and Ring of Fire and I know how hard you work and the long hours you put in.
Taxes take some effort to do, but it's not so annoying that it's worth giving up 5% of my earnings for. It's not worth it to pay thousands of dollars to MBO when a calculator and a little organization would do the same thing for free. Anyone can open an IRA, why should I pay for MBO's 401k? Looks like some companies messed up somehow and don't want to take responsibility, so they are sticking freelancers with the bill.
IRS problem is a large load to bear everyday. The tax season is a frustrating time for many taxpayers. Since tax season is coming up, people are wondering about how easy it might be to challenge the IRS on tax deductions. Well – the thing is that you have a 90% chance of getting shot down, and you'll have to run for payday loans over late penalties. People might have seen the recent court case where Lori Singelton Clarke notched up a win against IRS denials of her deductions. She won, yes, but you're better off with sticking to a strict interpretation how to deduct from your taxes.
If you do not want to do your receipts you can hire some one to organize them. It seems to add an additional expense on top of all the other expenses, but at a rate which may not benefit the freelancer. An Accountants job is to make sense of your expenses come tax season,based on the actions you had to take to remain employable, it won't change their rate in terms of doing your taxes. I always have this conversation once in a while with my accountant because they really do not know the nature of the beast. What happens if they come up with this 401k plan and it's doesn't work with your own objectives, then you are paying for a useless service. Even though you scan in receipts based o the job, what about all the intangible thing which apply to your career besides just the job expenses,for instance the classes(art and technical)and equipment which you know will become prevalent down the line. If the money is already taxed out you may no longer have the necessary disposable income to invest in yourself. It's also a bad idea to give the government a interest free loan. Would it take just as much time just to slip a receipt into a envelope for the proper category then scanning it and uploading it.
Surely MBO are contradicting themselves. How can you prove to the IRS that you "work" for MBO if it is the animation company who has the Employer/Employee relationship with you as defined in the article:
"... 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 ... if their work is critical to the company, as far as the IRS is concerned, they’re an employee"
Will there be problems about this come Tax season????
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.
Worker classification is also not as black and white as MBO describes in the article. The article describes half truths that spin obviously in MBO's favor. There are many other factors that are weighed.
The Freelancer's Union was offering 401k's and medical and dental plans before MBO came along.
Post new comment