The IRS and the Freelance Dilemma
Payments to MBO are made via electronic transfer and the artist can monitor the entire process from their computer. The artist’s expenses (usually from receipts submitted via scanner or iPhone photo) are deducted from their pre-tax billings and the artist is paid the balance either by check or more likely, an electronic transfer directly into their bank account from which withholding taxes and Social Security payments have already been taken out.
It’s a win-win process: the employer is sheltered from the wrath of the IRS and the artist has the equivalent of a back-office doing the bookkeeping, going after slow-paying clients and performing other tasks creative people often let slide; opt-in benefits like low-cost health insurance and an “aggressive” retirement investment program sweeten the deal.
Someone has to pay for all of this, and that payment takes the form of MBO’s 5% cut of the artist’s paycheck. (Once past the $125,000 mark, MBO’s fee drops to 1.5%.) It’s an expense usually shared by the artist and the client, who is also benefiting from the legal shelter and tax payments MBO provides.
“Right now some 200 animation and effects people in 21 or 22 companies are using our services,” say Zaino, including Psyop and Gretel in New York as well as Motion Theory in Venice. Even though MBO tracks their artist’s finances, they don’t (as of yet) do their tax returns, but “we do plan to build a network of accountants to partner with. We’ll be able to upload data directly to their computers.
“We’re focusing on infrastructure – there are a lot of things we’re actively considering like building a connection center where our people can access services like car rentals, accountants and even each other. I’d say it’s about a year out at this point.”
Psyop’s Chief Financial Officer Tom Boyle traces the consultant/employee schism to the dotcom days of the late 1990s when Microsoft “treated consultants the same as employees. The IRS told the company ‘you should’ve been withholding payroll taxes,’ and once the consultants realized they fit the definition of an employee while the guy sitting next to them really was an employee with stock options, they wanted some of that wealth too."
Boyle cites cases where a person worked one day on a project “and the Department of Labor came back and said for that one day they were your employee, you should put them on your payroll for that one day,” the sort of episode that prompts companies like his to use MBO. He estimates that 90% of the freelancers who come through Psyop are paid through MBO. “Only about 10% of them would pass the test as a true consultant,” he says, illustrating the difference between a contractor and an employee. “It’s more than only coming in a small number of days; we don’t control or supervise them, they don’t use our equipment, they’re not working on our premises.
“Think of a painter who comes to your house, gives you a quote and asks you what color you want. Then he comes back, sets his own schedule, hires other people to work for him, brings his own equipment. At the end of the day you pay him. That’s what they call a true independent contractor. Not someone who comes to your office, uses your equipment, comes to meetings with you, and does the same work as your regular employees.
“We chose MBO as our preferred vendor. We won’t take any freelancers unless they come in through MBO or a similar company. We met with a few other companies,” Boyle admits, “but we thought Gene understood all the issues a company faces, and they make us compliant with the regulatory environment, which is critical. They’re a nice solution for our industry. We’re able to engage freelancers on our projects in accordance with the IRS and Department of Labor employment practices. I don’t have to worry about the IRS knocking on my door and telling me ‘this man should be an employee.’”
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On the subject of misclassification I would like to add my two cents. I know artists that are currently or have recently worked at the Psyop office in Los Angeles. These artists are working at that studio, under supervision and on the company's equipment yet have still been enrolled in the "Exec" program per MBO's recommendations. There is no way that MBO can sit there and say they have no idea or are unaware of this. They've been to the studio and talked to many of the artists, so they know. I think they just don't care. Their main objective is to help these studios save money and avoid taxes. I would have to say that probably 90% of the artists working in these vfx studios should be employees, period. So for them to be automatically enrolled into this exec program is ridiculous. I also think it's ridiculous that these vfx studios make it mandatory for their artists to sign with MBO to even work there. Any way to save a buck, I guess.
I don't think MBO is entirely a bad thing though. I think the service they provide is legit in cases where people are actually self employed but for vfx studios that's just not the case.
If I were in that situation I would definitely consider incorporating. You will end up paying less in self employment taxes then you'd be paying in payroll, employer and employee taxes through MBO.
Liz,it is not difficult to carry on a meaningful discussion here. Just continue to hit the "post comment" button. It's better for the discussion to be out in the open here so that people can understand the context of your response.
It is inappropriate of you to ask for the identities of the people who posted here, even if many of the comments are negative. It should be obvious that many of the people who posted here work in animation and visual effects, and should be given credit for their opinions of MBO. Who you are doesn't impress me, and so far, your responses have not addressed the issues raised here.
Freelancers should be concerned that MBO is encroaching on their freedom. If you honestly believe that paying 5% of your wage in order to work is a 'modest fee', I suggest you enroll in the 'exec' "program".
Further, if you really believe that people that enroll with MBO can double their wages from $62,380 to $125,000, you are seriously out of touch with the reality of most freelancers. I suggest you take a more detailed approach in your research.
What your description of MBO's 'Exec' "program" also neglects to explain is that the sum of the employer and employee taxes MBO withholds is actually greater than the Self Employment Tax independent contractors pay. Also, you have not explained how MBO can even charge the employer taxes and the service fees to the freelancers in the 'exec' "program" since legally they would be MBO's employees.
As for the pay rate that legit professional staffing and consulting firms give their workers, what you neglect to describe is that people working under firms also have pay rates that are much higher than average staff wages. In addition to the high pay rates, staffing and consulting firms pay overtime. Your statement that firms take a cut of the worker's pay is simply not true.
Legitimate staffing and consulting firms bill the companies for the service fees and employer taxes, it does not come out of the worker's paycheck regardless of pay rates. Many staffing and consulting firms even offer benefits. A crucial difference between working under a consulting firm and MBO's 'Staff' "program" is that if I work with a consulting firm, there is no need to get permission from my clients to take this approach in my pay.
I would also like to hear an explanation for MBO's professed ignorance of the recent classification of freelancers in our industry. Please address the fact that MBO has been targeting freelancers with the message that they could no longer be independent contractors, and then automatically enrolling freelancers in the 'exec' "program".
Although there is a lot of debate here, I don’t believe we are truly at odds. Let me attempt to explain. Since this isn’t a forum, it’s challenging to carry on a real dialogue. To facilitate this Q&A, we are opening a space on our website here. As points require clarification, we’ll be posting there. Comments are enabled, so please participate.
Before I continue, if you have a question regarding your classification with MBO Partners, contact your Business Manager. To escalate your concern to management, you can call Steve Arhancet, our Director of VFX and Animation Programs, at 1-800-220-0469 x 6011. If you are not running a business, but expect to be an employee of someone else’s business, we do have a standard payrolling offering where you receive an adjusted hourly pay rate without having to fund any employment and business insurance costs. Give us the opportunity to address your situation directly.
There is a lot to reply to, and I will cover everything I can in the Q&A linked above. A few key points for now:
Independent artists who wish to be in business for themselves should be allowed to continue as such, in compliance with the law (a feat which is getting more onerous by the day). It is possible for an artist to run a true independent business in this country. There are many freelance VFX artists and animators who highly value, and will defend to the teeth, the freedom, control, and profit potential of the entrepreneurial lifestyle. [*It is worth noting that in the Mograph forum, the chief fear is that we will compromise their independent contractor status, a discussion quite opposite in tone to the one unfolding here, where the main thrust is an insistence on employee status with entitlements.] To operate lawfully and build your own business practice, you can either go through the MBO Partners offering (where you are essentially employing yourself under the MBO Partners compliant umbrella), or take the steps of setting up a compliant corporation and operating a legitimate, tax-paying business in every sense of the word. It’s a lot of work but you can do it.
The MBO Exec model is for people who are “in business” and self employed. They market their businesses to clients, have recurring expenses, and are entrepreneurs. As noted above, MBO Partners has a staff model for people who are not running a business. We do our best to offer the best programs; if one of our clients believes they are in the wrong program, we will fix it.
Prompted by this discussion, we have audited our rolls of micro-businesses in this industry. Artists who are in business for themselves via the MBO Partners platform are by no means bringing down the industry with low rates; rather, they are all highly compensated. The average VFX / animation artist in our MBO Exec program today is on track to generate in excess of $125,000 in annualized billings to their clients. They are skilled at negotiating day rates, and most of them have multiple clients, with plans to expand their portfolio of clients and grow their business practice. After our modest fee (which also includes the cost of significant business insurance coverage) and after taxes, including self-employment taxes, their adjusted gross income is far above par for hourly employees performing similar work. Many of them are successfully growing their businesses and have other people working for them.
This demonstrates the power of entrepreneurship, where you assume the risks and responsibilities of being in business (finding gigs, providing for your own safety net, funding the required payroll taxes and insurances of being in business, etc) in exchange for real profit potential and freedom (working as much as you want, having multiple channels of potential client income, advancing your skills, getting tax breaks for your business expenses, taking extended time off).
Our research indicates the annual wage for a 3D animation/VFX employee of with 3 to 5 years experience ranges from $55,000 – 65,000 a year. According to the BLS, the mean annual wage in this area was $62,380. This means the entrepreneurs in our program are successfully earning roughly double the “take home” that they would if they worked as employees instead of operating their own businesses.
If going into business for the potential of making twice the industry wage is the result of being “young and stupid,” as one anonymous commenter charged, then I aspire to be stupid too. To me, it sounds like a successful business venture made by highly talented artisan entrepreneurs.
Our mission is simple: to help American small businesses owners operate efficiently, and make it easier for them to work with clients. You don’t have to choose us as a vendor. The presentation we use at studios describes Three Models of Working and how individuals can pursue one of those models through us, or through other means. I’ve written a detailed post about that here.
If you aren’t really running a small business practice, let us know. As illustrated by the BLS figures, there is a difference between freelancer 1099 rates which you may be familiar with (typically higher because of the uplift for business overhead including expenses, self-employment taxes, etc), and normal employee hourly wages, which are lower because of the payroll costs and benefit programs that are involved. I’ll be writing about “bill rate versus pay rate” and what that means on the new Q&A site, as that’s a complex topic. Either way, we can assist you in evaluating whether being in business for yourself is a good option for you. It isn’t for everyone.
For those of you who posted anonymously with some excellent points, I would love it if you identified yourself so that we all understand whose interests you are representing and where you are coming from. I sign my real name on my posts, and I invite you all to do the same. In addition, the invitation to talk is not lip service. Please call so we can answer your questions directly at 1-800-220-0469.
I plan to continue writing and responding to your comments on the new Q&A pages we’re building. Come participate there.
Sincerely,
Liz Greene
Director of Marketing
MBO Partners
http://creative.mbopartners.com
http://mbopartners.com
1-800-220-0469
I agree with everything you say, except that what MBO has to do is stipulate the employee is truly a freelancer.
MBO doesn't have that authority, only the IRS and the state can do that. If California says that we are employees, not independent contractors, we are employees.
The law clearly states that if we are employees, we cannot be charged the employer taxes.
But, if we are truly independent contractors, our taxes cannot be withheld, and MBO is out of business. Even so, independent contractors cannot be charged the Employer Unemployment Insurance taxes, which MBO does.
The only way MBO can have the right to withhold our taxes is to 'hire' us as their employees (which they do). In which case, the argument goes full circle, and we still can't be charged the employer taxes.
MBO is either very confused about classification and taxes, or they are lying through their teeth.
"If you believe that you are a misclassified employee merely disguised as a freelancer, you should NOT be a part of our program.
Let us know immediately if you believe you are a misclassified employee and we will assist your transition into a different solution more appropriate for you.
Worker misclassification is a growing issue in the United States that we take very seriously. I blog about misclassification to raise awareness of the problem. From truck drivers to strippers, nurses to WWF wrestlers, I’ve covered the epidemic and the problems it generates."
If MBO is so concerned with worker misclassification, maybe you can explain why you're sending out your employees to these studios in order to actively "recruit"?
Someone had brought up the fact that nearly all of us freelancers don't legally qualify as an independent contractor because we work on the premises, are told what to do, and use the studios' equipment.
You can't tell me that MBO does not understand these facts, because they've BEEN TO THE STUDIO I've worked at, and talked to every "freelancer" there.
We should not be paying the employers payroll taxes.
I'd like to hear an explanation from MBO.
Hi Wake Up Artist:
I'd love to chat with you about the issues you've raised here ...
Hello Liz,
Thank you for replying to this.
What you need to know is that your "clients" who do visual effects work in los angles are purposely misclassifying contract employees who work ON premises ON company equipment under direct Supervision as "freelance". Many of these workers are ignorant to local and state labor laws and/or are "happy" just to work "in the business". This creates an underground economy that undermines both the value of the work and business and puts into jeopardy legitimate business that operate according to the labor laws. Worse, its a worker right violation because "freelance" employees aren't protected by worker rights they way contractors are, i.e. complying with unemployment insurance, workers’ compensation, social security, tax withholding, temporary disability, and minimum wage and overtime laws that protect workers. They say go to MBO for that.. the Problem is that they work on premises, and are NOT freelancers. Plus the companies tries to get them to work at a flat rate, work long abusive hours, etc.
What MBO has to do is stipulate up from that the employee is truly a freelancer, and not a contract employee..
TO the VFX artist out there, especially the young stupid ones, these are your rights:
1) If you work on premises.. even for one day, you are a CONTRACT employee, not a freelancer and should be incorporated into the employer's payroll. Not MBO's.
2) If you work on premises you are entitled to state law breaks and OT pay after 8 hours.. none of this flat rate nonsense.
read more here:
http://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm.
Do not contribute to an underground economy in VFX. You may think it employs you now but you are mortgaging your future.
INCONSISTENT STATEMENTS:
Thank you for writing, however your response has undermined the whole premise of the article: that freelancers working in VFX must be considered employees by the IRS and state labor laws.
You have said that MBO is ONLY for independent contractors. Then if this AWN article is true, no animators or visual effects personnel could ever qualify to use MBO, and MBO is wasting their advertising.
However, if you are right that animation and visual effects freelancers really are independent contractors, then you are essentially contradicting the IRS, this article, and even your own CEO.
In the words of MBO's CEO Gene Zaino, "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.”
If you do blog about misclassification, I think you should answer some questions:
1) Are freelancers that work in our offices independent contractors, or employees?
2) If they are independent contractors, why are the IRS, state laws, and Gene Zaino wrong?
3) Conversely, if freelancers that sign up with MBO legally become MBO employees, how can MBO charge the Employer taxes and service fees from the freelancers wage?
IF MBO REALLY WANTS TO HELP FREELANCERS, THIS IS WHAT THEY SHOULD DO:
1) Stop charging freelancers the Employer payroll taxes. This is questionable and should be billed to the companies freelancers work for separately like other third parties (such as staffing firms) do.
2) Stop charging the freelancers the 5% service fee. This should also be billed to the companies separately.
3) Stop calling the freelancers a subdivision of MBO . It is misleading. MBO should be more transparent and explain that what MBO is actually doing is hiring the freelancers as their own employees. The proof is in the contract and on the W2 forms.
4) Pay overtime, rather than a flat fee. If MBO is complying with labor laws and wants to help freelancers, then MBO should be happy to do this.
My name is Liz Greene and I work for MBO Partners as the person responsible for the messaging about our service. I am reading your comments, and want to let you know our doors are open. If you have questions about our service, or you want to better understand how it works for your own business (taxes, business expenses, benefits), please call during business hours at 1-800-220-0469 or write to us via vfx (at) mbopartners.com.
I have great interest in every perspective discussed on this board. Your comments touch on labor law, taxes, what’s good for the industry, and worker misclassification. I am preparing a full response that I hope to post a link to soon, but in the meantime please allow me space to clarify one thing:
Our solution is only for self-employed individuals.
The MBO Partners flagship business platform, MBO Exec, is strictly for professionals who consider themselves true self-employable freelancers, independent consultants, and independent contractors. Through MBO Partners, you operate your own business, your own P&L. We closely emulate the experience of self-incorporation for independent businesses, with tax advantages and support elements that make it easier and more efficient to run. The platform can also help you more readily qualify to work for clients of any size. Our program is certainly not the only way to operate as a compliant solo business, but since 1986, thousands of independent professionals have chosen us as their preferred platform.
If you believe that you are a misclassified employee merely disguised as a freelancer, you should NOT be a part of our program.
Let us know immediately if you believe you are a misclassified employee and we will assist your transition into a different solution more appropriate for you.
Worker misclassification is a growing issue in the United States that we take very seriously. I blog about misclassification to raise awareness of the problem. From truck drivers to strippers, nurses to WWF wrestlers, I’ve covered the epidemic and the problems it generates.
We do not support worker misclassification or tax evasion.
To the contrary, our only mission is to make it easier for true independent professionals to operate their business-of-one in a tax compliant manner, with the infrastructure and support of a big company.
At MBO Partners, we have processes in place to ensure everyone entering our program understands how this works and perceives themselves as an independent freelance artist. Our initial consultation process, before someone ever gets started, generates a financial estimate itemizing how the accounting works. We also schedule a one on one call at the time of the first payroll to ensure we can walk through the numbers together with each individual. We put great emphasis on our financial transparency.
If you believe the tax accounting for our program was not adequately explained, I invite you to call us during business hours for prompt assistance to retrieve the financial estimate that was prepared during your enrollment. Your Business Manager will be happy to set up a time to walk through it. We can also speak with your accountant, if you prefer.
Regarding AWN and Mr. Strike’s article, it was produced independently. We were not given editorial review or even opportunity to fact check the write-up before it was printed. Even though I am the Director of Marketing at MBO Partners and our public relations contact, I did not see the article until it was live on AWN.com.
This is an important conversation, so thank you for reading and contributing your thoughtful questions. More detailed responses are forthcoming. We’ve also got lots of FAQs on our main website here http://www.mbopartners.com/Individuals/faqs.html if you'd like to read more right now.
Sincerely,
Liz Greene
Director of Marketing
MBO Partners
http://creative.mbopartners.com
http://mbopartners.com
1-800-220-0469
What I've been reading on threads elsewhere is that New York VFX companies who had offices in California (like Psyop) didn't want to comply with California's much stricter labor laws. To get around labor laws, companies hired MBO to avoid paying the employer payroll taxes and overtime with shady accounting. Because the freelancers would do all the invoicing through MBO (using MBO software), MBO would have total control over how they report work hours, contracts, and wages. That's how they get around labor laws and how they can have the freelancers pay employer taxes.
Then companies like Psyop spread MBO to New York. Now they are trying to sell it as a 'service' to freelancers, but it is really just tax evasion.
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