Table of Contents:
- Defining Independent Workers & Gig Platforms
- Government Policy on Independent Work
- Choosing a Work Category
- Finding a Price Range
- What are the Drawbacks & Limitation of Independent Work?
- Freelancing and the Social Safety Net
- Taxes & Finance
- Freelancer Rights
- Samaschool Resources
For REDF’s Q3 2019 Bay Area Convening we covered the topic, “An Introduction to Freelancing & the Gig Economy” facilitated by Samaschool. Samaschool’s mission is to equip people to benefit from independent work and advocate for an economy in which all workers thrive. The workshop was attended by Bay Area ESEs but much of the information shared is applicable to ESEs throughout the country.
REDF hosted a session on gig economy as a response to growth within the gig economy sector across the nation and having received questions from social enterprises regarding how to navigate members of their social enterprise engaging in independent work while participating in their program. We think it is important for employment social enterprises to be more informed about the gig economy so they can help their employees, program participants and alumni identify:
- If the gig economy is a good fit for them.
- How to engage in gig economy in a way that is personally and financially sustainable.
This guide provides an introduction to independent work and context on the niche challenges and climate that have emerged in the “gig economy” across the nation. The topics discussed throughout this learning guide are:
- What is “independent work”
- The motivations of why people pursue freelance
- Freelance policy and contractor rights
- Navigating unemployment benefits as a independent contractor (e.g. SNAP / Food Stamps)
The intention of this training is to provide a lens of understanding towards how participants of social enterprises engage in gig work, the challenges they may face in their pursuit of this work and how your employment social enterprise can stay informed in this transforming economy.
Defining Independent Workers & Gig Platforms:
Who are independent workers?
Independent work can also be referred to as…
- gig work
- side hustle
- side job
- on-demand work
Below are some of the major differences between a independent worker and an employee.
IRS Key Factors
When looking at a workers IRS status, the “independent worker” refers to a worker who receives a 1099 form instead of a W-2 form. Some of factors that guide the decision are as follows:
- Behavioral Control:
“a worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised.”
- Financial Control:
“right to direct or control the financial and business aspects of the worker’s job”
“how the worker and business perceive their interaction with one another” i.e. contracts, benefits, permanency, services provided
Why do people freelance?
There are many reasons workers pursue freelance work. Within communities with barriers to employment those motivations become even more expansive, below are common motivations found among the freelance community:
- Access income
- Develop soft & occupational skills
- Have flexibility
- Build experience to strengthen a resume
- Gain confidence
- Make professional connections
Where do people find independent work?
There are a many different types of independent work that a worker can pursue, and most types fall under the category of “gig work” (e.g. DJ gigs, freelance programming, babysitting). With such a variety of opportunities one could pursue there are a variety of ways an ESE employee could find independent work.
Online work platforms – These platforms tend to have a lot of gig options and quick access to work. However their fees can be high and some platforms are more competitive than others. This avenue is a good fit for those comfortable using technology, especially opportunity youth. Technology platforms that connect workers to in-person opportunities may require background checks, which can be a hurdle for formerly incarcerated.
Online job boards – These platforms have many job options and have the flexibility for workers to apply when they want to. However, generally requires an application process that can make it take longer to acquire a job. These platforms are a good fit for most people, especially Craigslist. They require a basic level of digital literacy.
Word of mouth & referrals – This avenue of finding work tends to have highly qualified leads. However it is harder to predict when the right opportunity will occur so there is less control on the workers part when they receive employment. This method is also more reliant on a workers community & professional network. This method is a good fit for everyone and the best way to get jobs and avoid paying high fees.
Staffing Agencies – This avenue of finding work entrusts a third party entity to find work on the workers behalf. This tends to mean there is less control on the workers part and fees can be high for the service. This method may perform background checks before assigning workers, so this method may present barriers for formerly incarcerated.
A few online platforms that are commonly used to find various types of gig work are provided below:
Gig Platforms & Benefits
Online work platforms offer certain benefits that make the workers process of searching and connecting to a new gig opportunity an intuitive and reliable experience. Below are common benefits that can be found across various gig platforms:
- Public profiles showing workers’ skills & experience
- Ratings & reviews help workers establish a reputation & build trust with clients
- Payment services help workers get paid faster
- Search functions help workers and clients find each other
- Messaging services keep workers email & phone number private
- Some liability insurance may be provided (This is dependent on the platform the worker is using to seek employment)
Gig Platforms Registration Requirements
While there are multiple online work platforms a worker can choose from to find their next gig opportunity, most online work platforms MAY require the following criteria in order to pursue work through their platform:
- Social Security Number or Taxpayer ID
- Ability to work in the US
- Smartphone with internet data plan
- Basic English proficiency
- Bank account
- Ability to pass background check
If a worker does not meet all the requirements of online work platforms, they can still find gig work through referrals, job boards, and staffing agencies.
Most platforms charge fees or take a commission on jobs workers complete.
Usually 20-40% of the total job cost.
Types of Online Work Platforms
There are two types of platforms independent workers will experience when interacting with online work platforms: automatching and marketplaces. Each type has a different way that freelance workers interact with potential clients and the larger gig community.
Use algorithms to automatically match
clients and workers based on factors like
location and work category (i.e. Lyft)
Enable clients & freelancers find each
other and negotiate project details (i.e.
Government Policy on Independent Work:
Over the past two years legislation has been passed in regards to the worker classification of independent contractors. Two major pieces of legislation that have passed within the state of California are detailed below:
- Dynamex Operations West, Inc. v. Superior Court of Los Angeles: This ruling ensures companies use the “ABC test” to distinguish whether a worker is an employees or an independent contractor
- CA Assembly Bill 5: The bill classifies gig workers as employees instead of independent contractors.
Dynamex Operations West, Inc. v. Superior Court of Los Angeles
This California Supreme Court ruling instructs businesses to use the so-called “ABC test” to figure out whether a worker is an employee. To hire an independent contractor, businesses must prove that the worker:
A. Is free from the company’s control
B. Is doing work that isn’t central to the company’s business
C. Has an independent business in that industry
If they don’t meet all three of those conditions, then they have to be classified as employees.
CA Assembly Bill 5 (AB5)
September 18, 2019 California Governor, Gavin Newsom, signed Assembly Bill 5 which expands which workers are granted employee benefits. This bill classifies gig workers as employees instead of independent contractors, thus giving gig workers access to full time employee benefits such as medical insurance, paid time off, etc. If you would like more information on the current state of AB 5 you can learn more here.
Choosing a Work Category:
While anyone can choose to pursue freelance or independent work, the gig economy can be a demanding industry to participate in. To the extent that given the degree of motivation, time, and financial management required, gig work is often most suitable for those who are already job ready and seeking to supplement or fill gaps in income from wages.
When choosing a work category, encourage your social enterprise participants to consider:
- Skills: what types of work can they do?
- Interests: what are their passions?
- Motivation: why are they pursuing freelancing?
What are the different motivations of those who pursue independent work?
Earning Extra Income
Cover expenses or support themselves while training, going to college, or starting a business
Finding Flexible Work
Work when and where they want in order to accommodate their schedule
Developing skills and work experience that can be used to get a full-time job
Trying New Careers
Try new career options, or turn their passions into an income generating side-hustles
Make new professional contacts that can open doors in the future
People can combine different types of work to meet their various goals. For example: Drive Uber to earn extra income, cover expenses or support themselves while training, going to college, or starting a business.
Finding a Price Range:
One of the most challenging areas for gig workers is knowing how much they should charge in total for their services or the hourly rate they should charge for their services. How do they assign a quantitative value to their skills and services? For this reason many new to gig work initially fail to take all of their expenses into account when setting their rate and are unaware that they should calculate an effective hourly rate that is sustainable for them prior to bidding on work
When in the role of coaching and advising independent workers on calculating “their” effective hourly rate, the formula below serves as a good starting calculation for workers new to gig work or as a “price checker” for those in your organization already working in independent work. They can gauge whether they are charging a price that allows them to maintain financial sustainability.
Calculating an effective hourly rate
If a worker gets a 2-hour job for a fixed price of $60
Expenses = $5 for gas + $10 platform fee (16%) + $15 savings for taxes (25%)
$60 (total earnings) – $30 (total expenses) / 2 (total hours) = $15 effective hourly rate
What are the Drawbacks & Limitations of Independent Work?
While there is a flexibility and independence that comes with pursuing freelance work there are some limitations and drawbacks to be aware of as workers pursue independent work in the gig economy. Below will review the drawbacks associated with hidden costs of freelancing, the social limitations associated with freelancing, and the lack of supports and protections in the gig economy.
Hidden Costs of Freelancing
Independent workers must pay a self- employment tax of 15.3% for Social Security and Medicare,
whereas employees have half of this covered by their employer. Independent workers carry a greater responsibility for filing and paying taxes than do employees who have taxed withheld from their paychecks throughout the year. Independent worker often need to calculate, independently allocate savings towards and pay estimated taxes.
Independent workers must find and pay for their own health insurance, and do not receive any paid time off,
sick leave, unemployment insurance, workers’ compensation, or other benefits and perks.
These apps and websites are run by for-profit companies, almost all of which charge fees in the range
of 10-40% of earnings.
Independent workers must provide their own materials and equipment for their respective projects or services, and are not generally reimbursed.
In a 2016 study conducted by Deloitte, nearly half of people who stopped working as independent contractors cited lack of connection to an organization as a discouraging factor in returning to work independently in the future.
Lack of Supports & Protections
Independent workers are not protected under the Civil Rights Act, and therefore have limited legal recourse in the face of discrimination or harassment.
- 47% of Black independent workers,
- 25% of Asians
- 22% of Latino/as
Reported experiencing discrimination.
Freelancing and the Social Safety Net:
One of the largest concerns among freelance workers and those supporting them is ensuring that there are social safety measures in place for the period of time that workers are searching for work and once they secure work. Below breaks down two social safety net resources available to independent workers: unemployment benefits and SNAP / food stamps
It is challenging at times for workers to know if they qualify for unemployment benefits or what the criteria are to qualify for unemployment benefits.
Two primary questions that are normally asked by workers around unemployment benefits are:
1. Are you eligible for unemployment benefits if you were working as an independent contractor but the work stopped (e.g., clients stopped hiring you or the major project you were working on ended)?
- An independent contractor who becomes unable to find work is NOT eligible for unemployment benefits.
2. If you were an employee but lost your job, can you work as independent contractor while collecting unemployment benefits?
- The answer to this question varies depending on the state that you are seeking unemployment benefits in. More information around unemployment benefits can be found here.
SNAP / Food Stamps
When calculating eligibility, self-employment income is calculated by taking the gross earned income from self-employment and deducting either the actual costs of self-employment or 40 percent of the gross earned income from self-employment.
- The recipient chooses whether to deduct actual costs or 40 percent of gross earned income.
- The recipient can change whether to deduct actual costs or 40 percent of gross earned income every six months at their semi-annual review.
Actual allowable costs of self-employment include, but are not limited to identifiable costs of:
- raw material
- other durable goods
- interest paid to purchase income producing property
- seed and fertilizer
- payments on the principal of the purchase price of income-producing real estate and capital assets
Allowable costs do not include net losses from previous periods; federal, state and local income taxes, retirement contributions; and other work-related expenses such as transportation; depreciation; and any amount that exceeds the payment a household receives from a border for lodging and meals.
If self-employment income is received monthly, the actual amount of income is used. If self-employment income is received less than monthly, it is averaged over the period of time the income is intended to cover.
At the time of application, income and expenses from self employment are verified either for the past year or for last period income was earned and intended to cover.
If the household experiences a substantial increase or decrease in self-employment income and can verify the average amount does not reflect the household’s actual circumstances, the county calculates self-employment income based on actual earnings.
Total household income is determined by adding net self-employment income to any other earned income the household receives. Note that the 20 percent earned income disregard is taken from the total net household income, including net self-employment income.
If the household is eligible based on net monthly income, the county can offer to determine the benefit level either by using the net income used to determine eligibility or by prorating the household’s total net income over the period for which the household’s self-employment income was averaged.
The Employment Development Department offers an optional Disability Insurance Elective Coverage (DIEC) program for employers and self-employed individuals who are not required to pay into State Disability Insurance (SDI) but want to be covered by Disability Insurance (DI) and Paid Family Leave (PFL).
DIEC is funded through quarterly premium sand can protect against partial loss of income when unable to work.
DI provides benefits to eligible DIEC participants when they are unable to work and lose wages due to their own non-work related illness, injury, pregnancy, or childbirth.
PFL provides benefits to eligible DIEC participants when they need to take time off from work to care for a seriously ill child, parent, parent-in-law, grandparent, grandchild, sibling spouse, or registered domestic partner or to bond with a new child entering the family through birth , adoption, or foster care placement.
In the field of freelance there are generally questions regarding workers’ safety and security while on the job and throughout the transaction of freelance work – accepting the job, completing the job, and the workers’ payment for the work. Below are practices workers should keep in mind and adopt as they execute their freelance work:
Workers should be wary of clients who request to handle money for them:
- Don’t transfer cash
- Don’t withdraw cash from an ATM for a client
- Don’t transfer funds via PayPal, Venmo, WePay, or similar site
- Don’t exchange currency
- Don’t rent anything with a workers credit card
- Don’t but gift cards, luxury items, or expensive electronics
Dealing With Emergencies:
Workers should always have a safety plan in mind.
If they feel unsafe, follow these steps:
- Determine if they’re in immediate danger, and if so remove themselves from the situation before doing anything else.
- Contact help, either using 911 in an emergency or the platform’ customer service is it is a less severe situation
Call Customer Support if:
- The client makes an employee uncomfortable or asks them to do something unreasonable or illegal
- They’re unable to finish a job due to a safety concern.
Call 911 if:
- The client threatens an employee in any way or if they’re in immediate danger
- A medical emergency arises.
Workers in the freelance field generally must prepare their own contracts which outline the terms and agreement of their work or project, the means by which they will execute their work and the deliverable they will present at the end of their contracted work. Below reviews why workers need a contract for their independent work as well as common mistakes independent workers should avoid when drafting contracts for their work.
Why does a independent worker need a contract?
- Off Platform: If they secure work outside of an online work platform
- Intellectual Property: If the job includes IP that they are licencing or retaining ownership of
- Extra Legal Protection: If they want to be extra careful and get coverage beyond what online work platforms provide
Make sure an employee has a contract in place before they begin work. (Can be on or off platform)
Common Contracting Mistakes:
- Not having an executed contract
- Not including the billing and payment terms
- Not including enough detail in the scope of work
- Not specifying ownership rights
Samaschool has created content on contracting templates & resources that can be found here.
Taxes & Finances:
For independent workers managing personal finances and earnings to ensure that they can live sustainably while pursuing freelance work can be daunting. Below is some best practices around ways independent workers can save their earning, pay taxes and still afford to pay for everyday expenses.
As a freelancer:
- They’ll have less stability in income than an employee
- They’ll have to save for retirement on their own
- No paid vacation time
Financial Planning for Freelancers:
- Save for a Rainy Day: Freelance income can be unpredictable. It’s more important for independent workers to maintain a rainy day fund to get through periods of low earnings.
- Plan for Retirement: Set up a 401(k) or IRA. There are many independent services that will help set these up.
- Budget, Budget, Budget: Keeping a close eye on spending will help independent workers afford larger expenses like vacation. holiday expenses or other big ticket items.
Employee vs. Freelancer Taxes:
- No Employer Withholding: Employers often withhold taxes for employees. Freelancers must set aside their own earnings to pay for their taxes.
- Tax Rate: Employers cover half of Security & Medicaid tax. Freelancers must cover the full amount themselves (16%).
- Freelancers can deduct expenses related to their business, including cell phone, home office, gas, and more.
Four Key Tax Takeaways:
- Freelancers only need to pay taxes on income over $400
- Save 25-30% of freelance earnings to pay for taxes
- Keep track of work-related expense:
- Common Freelancer Deductions include:
- Home office rent
- Computer software
- Cell phone service
- Gas & transportation
- Business travel expenses
- Health insurance
- Common Freelancer Deductions include:
- If a worker earn less than $66,000 they shouldn’t pay to file taxes
- Free Tax Filing Services include:
- CA: www.ftb.ca.gov
- NY: www.tax.ny.gov
- Free Tax Filing Services include:
- SF Bay Area:
- MEDA and neighborhood access points in SF
- Call 211
- SF Bay Area:
Independent contractors have MORE freedom, but FEWER workplace protections.
Freelancers have the right to:
- Control when, where, and how they work
- Have a signed contract with the client
- Market their services to other businesses and work with more than one client at a time
- Hire subcontractors to complete part of the job
Watch out for worker misclassification, the practice of calling workers contractors when they should be employees.
Freelancers DO NOT have the right to:
- Employer contributions to taxes, including Social Security tax
- Minimum wage and overtime
- Employer provided health insurance or workers’ comp
- Paid vacation or sick leave
- Protections from discrimination
Work Finder: www.samaschool.org/work
Proposal Generator: www.samaschool.org/proposals
Contracting Tools: www.samaschool.org/tools
Worker Rights: www.samaschool.org/workersrights
If one of your social enterprise participants wishes to pursue contact work you may use Samaschool’s Empower the Advisor (ETA). The ETA tool that Samaschool has created is meant to serve as a decision making framework for career advisers evaluating a job-seekers’ fitness for independent work. It is designed to create a conversation about career goals, possible roadblocks, and motivations for doing independent work. You can find the ETA tool below: