In 2017, 40.9 million Americans chose to work as independent contractors – about one third of the total U.S. workforce. By and large, these independent professionals work this way because they choose to do so. Their contributions – both to the workforce at large and to the American economy – are significant, about $1.2 trillion dollars each year.
This number, both in terms of size and economic importance, is predicted to rise significantly in the coming months and years, thanks in part to changes in the U.S. tax code at the end of 2017 that makes it financially advantageous for many professionals to go independent. As businesses bemoan labor shortages in critical areas like IT and R&D, turning to independent workers with in-demand skills seems a simple solution.
But this influx of independent workers isn’t without risk to companies, thanks to concerns about compliance, engagement and more. Today’s HR manager cannot ignore the issue, or simply decide not to work with independent contractors.
To help HR managers prepare, MBO Partners has done a thorough analysis of the new tax laws and what they mean for independent contractors as well as offer suggestions to help the way companies think about independent workforce engagement in 2018.
What’s Changed in the Tax Code and What It Means for Independents
Language in Section 11011 of the Tax Cuts and Jobs Act created a new portion of the Internal Revenue Code, Section 199A, which allows pass-through entities to take a deduction of 20% of qualified business income if they earn below $157,500 ($315,000 if filing jointly).
These new tax provisions have created substantive advantages to operating as an independent professional. For businesses, that means that while the number of independents has been growing at a rate more than five times greater than the traditional labor force for several years, we’ll likely see an even greater swell of available independent workers in 2018.
However, there remain many ambiguities of worker classification and a multitude of laws that favor traditional employment. Class action prosecutors, state agencies, the Labor Department and unions will be an opposing force, pushing independent work back toward a traditional employment arrangement, even as workers themselves struggle to declare independent status.
What Can HR Managers Do Now?
Until the government issues further guidance regarding independent workers and new tax regulations, providers must tread carefully to determine how to best engage these workers. If a business is found guilty of misclassification, the penalties and risk to your reputation can be steep.
- First, know the rules, even though they’re complex. Agencies including the Department of Labor and IRS both have specific guidance on use of independent contractors, and individual states have guidance documents as well.
- Next, clearly define your independent contractor population by using written agreements. It is very important that businesses maintain a clearly-defined scope of work to both establish project details and note that this is a business-to-business relationship, among other factors.
- If your organization has been engaging independents for some time, it is best practice to conduct an internal audit to make sure you have been engaging workers compliantly and to fix any historical issues.
- Moving forward, you’ll want to maintain some level of visibility into your independent workforce program. This means a clear and consistent policy that is followed throughout your enterprise about how to source, qualify, engage and re-engage this independent talent.
In the interim, we at MBO Partners know that much remains to be done. We developed a proposal for a Certified Self-Employed Solution (CSE), a certification that would allow independents to prove to both their clients and to the IRS that they are aware of the business risks and needs of going independent. We’re actively working on this with key leaders on Capitol Hill.
While businesses await further information, move forward cautiously — if optimistically — in engaging the independent workforce. It is a vital talent base and growing economic force that will only become more important in the months and years to come.
This publication does not constitute legal or financial advice.
| Gene Zaino, a nationally recognized expert in the contract workforce market, launched MBO Partners to re-invent the way independent consultants and organizations work together. Zaino is a major force in the independent workforce movement, committed to making it easier for self-employed professionals and their clients to work together.
Gene is an avid entrepreneur who graduated cum laude from the University of Pennsylvania’s Wharton School of Business, receiving a Bachelor of Science in Economics (BSE). After four years with KPMG as a CPA and management consultant, he spent 20 years building various consulting companies, some funded by financial luminaries Kleiner Perkins Caufield & Byers, Austin Ventures, and Goldman Sachs. He is a frequent speaker and has appeared in publications, radio and television including CNN, CNBC, Forbes, Harvard Business Review and The Wall Street Journal.