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.’”