People Are Freelancing in Record Numbers: Here's Why and How You Can
Since the inception of America, the way that the majority of the populations makes enough money to live has remained pretty consistent. People make an agreement to be compensated either for the amount of time spent working or completing a project. Most people have always had an employer. However, a trend kicking off now is "being your own boss", with 35% of people now identifying themselves as "sole proprietors" for tax purposes.
Why is this happening right now, and how can you get in on the action?
The Reason for the Boom in Freelancing
There are currently 57,000,000 people freelancing full-time in the United States, about 35% of the working population. Compared to 2015, 10,000,000 more people are full-time freelancers. There are a few key factors for this boom.
Tax Cuts and Jobs Act of 2017 (TCJA)
This controversial bill lowered federal income tax percentages across the board and doubled the personal exemption. It also placed a State and Local Tax (SALT) deduction cap of $10,000. This means that people may only deduct up to that amount of money they owe their state and locality if they live somewhere with state income tax, combined with their property tax. While these two items are what got the most press coverage, there was one piece of legislation that made a huge difference: the "QBI Exemption".
With income restrictions, this allows people to take 20% of their total business income out of their taxable income. The purpose of this rule was to combat the infamous "self-employment tax". In traditional jobs, employers pay half of workers' Social Security taxes (6.2% of income) and Medicare taxes (1.45% of income), and employees pay the other half. The IRS considers self-employed people to be on their own payroll, so they must pay the employer portion. This essentially adds 7.65% more in taxes for self-employed people, and the 20% QBI deduction makes up for a lot of that.
Wage Stagnation and the "Gig Economy"
Unfortunately, although unemployment is quite low at the moment, wages have not been keeping up with inflation or rising costs of living. At one point in time, people could expect to work hard at a corporation and have a lifelong career with great benefits, a guaranteed retirement, and a reasonable salary. However, corporations nowadays are not so generous, and part of the incentive to work for them has diminished.
Many jobs are turning into "independent contractor gigs", which have the same tax consequences as self-employment. These also have no additional benefits, making it questionable whether someone should work for these major companies or for himself or herself.
The Affordable Care Act (ACA)
This piece of legislation was passed under the Obama administration and is intended to help people with incomes between 100% and 400% of the federal poverty level (or $12,760 to $51,040) afford their own health insurance via federal subsidies. Health insurance has been a key benefit provided by employers since the WWII era, and many workers are scared to leave their jobs because they would lose their health insurance. However, the ACA makes it much easier to attain insurance.
Do You Want to Start Your Own Business?
So, now that we've looked at why the freelancing sector rapidly picked up the pace, you're probably wondering how you could be self-employed. It can be a very scary proposition to abandon the safety of that exact paycheck every two weeks, those benefits, and those paid vacations.
Remember, the best way to start a business is to build on what you already know and have done professionally. For example, a software developer might start bidding on gigs online while still employed full-time. "Moonlighting" and experimenting with the business in your free time while still employed is the safest way to go about trying this. It often takes many years to build a steady business, whether it's online or brick-and-mortar.
There are plenty of freelancing unions and groups out there who have tips on how to succeed as you're starting out. Since freelancing by yourself can get lonely, these groups provide a sense of solidarity. They can also be quite helpful with finances, explaining how you can deduct many expenses from federal taxes.
Over the past several years, policies have been gradually put into place that make freelancing easier to enter than ever before. Some people will be more comfortable with the wildcard of starting their own business than others, and that's perfectly fine. With a growing trend of freelancing in favor of traditional workplaces, companies may need to increase wages to entice people to not freelance in the future!