The coronavirus is accelerating a seismic shift in the employee- employer relationship. An April survey reported that nearly one-third of employers expect to replace full-time employees with contingent, or gig, workers. To save money, of course, because most gig workers don’t receive benefits such as health insurance and a retirement plan.
Gartner, a business advisory firm, estimates 15% to 25% of the global workforce is already employed in contingent jobs. By 2025, Gartner expects more than one-third will be gig workers. This is not confined to Uber and Lyft. It’s seeping into all types of jobs at all income levels.
If you recently joined gig nation, or expect to, it’s crucial to understand how to negotiate an offer from an employer who also has full-benefit staff. You’ll also need to step up and become your own payroll and HR office, handling taxes, health insurance and a retirement account.
Here’s what to consider.
Employers are saving lots of money by not paying you benefits. They want you more than they want a staffer. Don’t be shy about negotiating.
Benefits you’re not getting are likely worth more than $10,000 a year. Way more. The company knows this because they almost certainly have actual employees. In 2019, the average employer-provided health plan paid for 88% of a single worker’s premium and 70% of coverage for an employee with a family, according to the Kaiser Family Foundation. That worked out to an average for single employees of $6,000 and more than $14,500 for family coverage.
That’s just the premium. Most workplace plans also have lower deductibles and lower maximum annual out-of-pocket limits than the insurance you will need to get through the Affordable Care Act marketplace.
Do full-time staff have a retirement plan with a matching contribution? You won’t get that either. Every employer’s formula is different, but assume that someone eligible for a workplace plan who makes $60,000 and contributes 6% of their salary would be in line for an $1,800 match.
Then there’s paid vacation, paid sick time, maybe a life insurance benefit, and fringe benefits – gym or commuting stipend – that add up.
You get the idea. Your negotiations on pay should include the cost of these items.
You’re going to need to pay income tax and self-employment tax every quarter. As an independent contractor, you will submit a W-9 form to the employer (rather than the W-4 that’s used for staff workers.) As a W-9 worker taxes are not withheld.
The employer will pay you your agreed upon fee at the agreed upon interval without withholding a penny for income taxes, nor for your required contributions to Social Security and Medicare, which are referred to as self-employment taxes. (If you have been a full-time staffer, the FICA line-item deduction on your pay stub was for Social Security and Medicare. You paid half and your employer paid half. As an independent contractor, you pay all of it, but when you file your federal tax return you will then be able to claim a deduction for these payments.)
Figure you’ll skip the quarterly payments and just deal with the tax headache once a year? Bad idea. There are penalties.
At year-end, employer(s) who paid you as an independent contractor will send you a copy of the 1099-MISC form it also submitted to the IRS showing the payments made to you. The IRS will square the income on the 1099-MISC with the income you report. If you underpay there are penalties.
You can deduct business expenses. If you’re working remotely, you may be able to claim a home office deduction, as well as get a tax break for tech or materials used for work – computers, desks, filing cabinets. You can also deduct a portion of cell phone and internet bills based on a fair estimate of how much of the time is spent working, not surfing or gaming.
My colleague Lynnley Browning has excellent advice about home office deductions: rate.com/research/news/self-employed-owner-cut-tax.
A CPA can help. An online tax-software prep can also work fine. Be sure to use the program specifically for the self-employed. To keep good records so tax filing is easy, do a web search of “self-employed business tax deductions” to start learning about what is eligible.
Be your own benefits manager. What you’re not getting on the job, you need to provide yourself. If you aren’t covered by a spouse or partner’s health insurance plan, it is insanely risky to go without coverage. Shop for individual health insurance coverage through the ACA marketplace (go to healthcare.gov). And see my earlier column on shopping: rate.com/research/news/health-insurance-options-laid-off
For retirement, too, you’re on your own now. A standard IRA is one retirement saving option if you are self-employed. The contribution limit this year is $6,000 ($7,000 if you are at least 50).
Eager to save more? SEP-IRAs have higher contribution limits. You are eligible for a SEP-IRA as a self-employed worker. Every discount brokerage offers SEPs. Another option is to use a solo 401(k), also referred to as an individual 401(k), though there is more bookkeeping involved.
“If you recently joined gig nation, or expect to,
it’s crucial to understand how to negotiate an offer from an employer who also has full-benefit staff.”
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