Freelance Nation

The other day, on a Manhattan sidewalk, I ran into a former colleague and asked her what she was doing these days. She shrugged: “I’m in limbo.”

When I looked her up later to connect online, her LinkedIn profile listed her as CEO of her own consulting firm. That didn’t sound like limbo to me, until I saw the fine print: “self-employed, myself only.” Scrolling through the rest of my contacts, I noticed that quite a few people in my professional orbit had titles like “president” or “founder” or “principal.” Some of these people, I know, are doing quite well; others are barely making it.

These days, being your own boss can mean any number of things: running a thriving business with employees and profits, landing steady gigs as a consultant, working the same job you used to have but with no benefits, or prettified unemployment and a life in limbo.

Even government statisticians are hazy about Americans without traditional jobs. The U.S. Department of Labor reports that about 15 million people are currently self-employed. But this category is broad: It includes a wide mix of “unincorporated” workers—like a freelance writer always hustling the next gig or a software engineer who’s been working for Microsoft for years on contract. It also includes people who’ve incorporated their one-person businesses—like, say, a candy-store owner or an accountant. Scott Shane, a business professor at Case Western Reserve University, estimates that 40 percent of Americans will be self-employed at some point in their life.

In addition to these folks, government data show that there are millions of Americans “operating unincorporated businesses (known as sole proprietorships), which may or may not be the owner’s principal source of income.” Think of a stay-at-home mom who does some catering now and then or a firefighter who moonlights as a contractor. Finally, the Census reports that in 2008, there were about 3.6 million micro-businesses with one to four employees.

It’s often said that America is becoming a “free-agent nation,” with a growing number of people working for themselves and starting businesses. In fact, though, the self-employment rate has actually fallen since 1980, and economists disagree about trends in entrepreneurship.

Shane, in his book The Illusions of Entrepreneurship, points to the recent decline in entrepreneurship rates and, more broadly, to the fact that a smaller percentage of Americans are starting businesses today than were a century ago. In an article last year, Shane drew on government data about new business formation to conclude that “the Great Recession had a negative impact on U.S. entrepreneurship. At the end of the recession, the United States had fewer businesses and self-employed people than it had before the downturn began.”

A recession, of course, can have opposite effects—prodding more people to set up shop on their own while depressing overall economic activity. Some of those who go out on their own may do well, while others barely scrape by and are essentially either underemployed or unemployed—as in the case of my former colleague. Government data show that 1 million self-employed workers were working part-time in late 2011 for “economic reasons”—meaning they couldn’t find more work.

 Small businesses also play a central role in creating new jobs and driving growth. As Robert Friedman, founder of the Corporation for Enterprise Development, writes, new “businesses under one year old, including both self-employed and incorporated enterprises, have produced an average of 3 million net new jobs annually” over the past 30 years, “more than all those created by older businesses combined.” In the future, moreover, a greater number of workers will be on their own whether they like it or not, as corporations continue to shift toward “just in time” labor practices—replacing salaried employees with temporary independent contractors.

Given all this, you’d think that policymakers would be bending over backward to support entrepreneurs and the self-employed. Yet America is not an easy place to go it alone. Summarizing research by the Organization for Economic Cooperation and Development, Shane writes that the U.S. has “higher regulatory barriers to entrepreneurship, greater administrative burdens on small business owners, and higher barriers to competition than a number of other industrialized countries.” While ideas abound for better ways to support free agents, what’s still missing is an overarching framework for facilitating the freelance life.

In thinking about such a framework, it’s helpful to start with two core American values: economic freedom and mutual obligation. A belief in empowering individuals to pursue wealth and autonomy through the market is widely shared in American society. But so too is the view that we need to look out for one another. What’s needed is a more flexible, modern form of capitalism that honors both values to facilitate self-employment and micro-entrepreneurship. This requires a bigger role for government in some areas—and a smaller role in others.

 

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Talk to anyone who works for him- or herself, or wants to, and among the key challenges that come up are fringe benefits, access to capital, and the need for professional support. Government can do more on all three fronts—and, in some cases, already is.

Start with health care, the Achilles’ heel in anyone’s plan to be self-employed. The new health-care law addresses this problem in several ways, most notably by making insurance more affordable to the self-employed by allowing such workers to shop for cheaper policies and by giving individuals with lower incomes a tax credit to cover the cost of insurance. Long term, though, the best way to boost Americans who want to be their own boss would be to create a universal health-care system that is delinked from the workplace. Such a system would mean a far bigger role for government in health care but would reduce burdens on employers and provide greater freedom for individuals to pursue their dreams through free enterprise.

A similar makeover is needed for our pension system. While the self-employed have several options for tax-deductible retirement savings, like an individual retirement account (IRA) or Keogh plans, these options share the main weakness of 401(k) plans—savings get eaten up by management fees and returns hinge on a volatile stock market and the timing of retirement. Beyond shoring up Social Security financially, what’s needed is a universal pension system that lets anyone easily stash away money for retirement with an assured rate of return.

One such plan, proposed by Teresa Ghilarducci—an economist at the New School and senior fellow at De¯mos—involves guaranteed retirement accounts. A GRA would be a portable individual account that you could pay into as a self-employed person and also have your employer pay into when you do have a job. It’s like an IRA and 401(k) rolled into one with elements of social insurance—and, in that way, nicely captures the reality that many workers today will spend periods both on their own and working for organizations. The difference is that the funds would be invested in large pools by the government and accounts would be annuitized at retirement with a guaranteed rate of return.

As with a universal health-care system, a government-run pension plan would be fiercely opposed by a private sector that now profits handsomely from 401(k) fees. Yet the upshot would be a more robust form of capitalism where individuals could take more risks in pursuit of wealth and personal autonomy through the market.

Democratizing access to capital is another way to empower individuals to chase their dreams. Here, too, government has a big role to play. Whether you’re starting an Internet company or a nail salon, you need cash. But the free market has a long history of failure when it comes to ensuring access to credit for everyone with a good idea.

The Obama administration is working to ease this problem with several initiatives, including expanded loans through the Small Business Administration (SBA). A new Office of Innovation and Entrepreneurship, which opened its doors last year at the Commerce Department, has identified expanding access to capital as a top priority. The Obama administration is also working to make it far easier for small businesses or individual consultants to do business with the federal government, which buys hundreds of billions in goods and services annually. Under the rubric of “Startup America,” the administration is launching an Entrepreneurial Mentor Corps, helping veterans start new businesses, and more. And, as part of the American Jobs Act, President Obama has proposed allowing individuals to use the Saver’s Credit to save money to start a business. (Most new businesses are financed with personal savings.)

Many state and local agencies also help individuals finance new businesses with loans. In December, for example, Mayor Rahm Emanuel announced the creation of the Chicago Microlending Institute to “train new lenders to make targeted loans to the City’s smallest businesses” and administer a fund for small-business loans with a $1 million pool of capital for supporting such businesses. In Texas, the City of Fort Worth subsidizes the office space of TECH Fort Worth, an incubator that helps entrepreneurs commercialize their ideas. New York City’s government is offering free intensive courses for entrepreneurs and ongoing mentoring.

 

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In many respects, it’s never been easier to start a business in America, and active government is a big reason why. But an even larger role for the public sector—and more resources—is necessary to help individuals build the human capital needed to succeed and to create the macro-conditions for business success through more stimulus, investing in supportive infrastructure, enforcing anti-trust laws, and delinking social insurance from employment.

Yet, at the same time, there are also places where government needs to get out of the way to reduce burdens on the self-employed and small-business owners.

Anyone who is self-employed knows that you get nailed big-time by having to pick up all your payroll taxes by yourself—a hefty 15.3 percent in 2010 (before the temporary payroll tax cut). While half of this sum is deductible, it’s still a big bite for anyone who works solo. The self-employed also can’t enjoy the tax perks for health care and transportation that go to regular employees. In New York City, the self-employed get hit with a 4 percent “unincorporated business tax”—on top of the extra payroll taxes they are already paying.

Two organizations that represent the self-employed—the Freelancers Union and the National Association for the Self-Employed—have been pushing for years to reduce the tax burden on people who work for themselves. So far these efforts haven’t yielded many policy changes (although small businesses have benefited from the tax credits in various stimulus efforts). Tax relief for the self-employed should be an area where Democrats and Republicans can work together.

Easing the regulatory burden on small businesses is another priority. Many of the rules for employers were designed with big firms in mind and can be a major headache for individuals working for themselves with a few employees. For example, in New York state, even businesses with just one employee must purchase workers’ compensation and disability-insurance policies for that employee and “keep accurate records of the number of employees, classification, wages and accidents” going back four years, according to state statute. Shifting currently privatized disability coverage and workers’ comp to general social insurance would both streamline these necessary programs and ease compliance.

And, of course, small employers everywhere have to deal with withholding federal payroll and income taxes—not to mention state taxes in many places and sales taxes for commercial establishments. While bigger firms can hire companies like Paychex to handle all this, small businesses can face an intimidating pile of complicated paperwork. A 2010 study for the SBA found that small firms with fewer than 20 employees pay three times as much per employee to comply with tax rules compared to firms with more than 500 employees. It’s not clear that the thicket of red tape around small business actually “kills” many jobs, and business owners seldom cite regulation as a reason for laying off employees. But the SBA study shows that small businesses bear a disproportionate burden for complying with federal regulations.

Among the drawbacks of hitting the little guy the hardest with regulation is that it feeds an antipathy to government that now stands at record levels. Overregulation also creates a target-rich environment for a conservative movement that touts itself as the savior of economic freedom even as it often opposes policies to help individuals become self-sufficient through the market. The Bush administration, to cite just one example, imposed deep cuts on the Small Business Administration—an agency conservatives have been trying to kill off since the 1980s.

In sum, much that government needs to help small entrepreneurs is proactive: delinking the social-insurance system from the workplace; creating national systems for health care, pensions, and disability insurance, so that businesses can focus on creating wealth, not administering the safety net; and remaking the tax system. At the same time, progressives should also lead in streamlining how government regulates these folks—all the while bolstering hard-won protections for workers, consumers, and the public.

Last November, for example, Securities and Exchange Commission Chair Mary Schapiro announced a new effort by the agency to reduce the reporting and disclosure requirements for small businesses raising capital. In New York City, the Bloomberg administration put forth a host of reforms in 2010 to simplify regulation of New York’s 190,000 small businesses.

If progressives want to persuade Americans that there’s a key role for government, they also need to make government work better. On the entrepreneurial front, government is already innovating to help small businesses and the self-employed. We could be doing a great deal more. 

Comments

I applaud Mr. Callahan’s desire to make government work better for the self-employed. As a self-employed farmer, I support much of his well thought out wish list. Unfortunately, over the last three decades the Republican and Democratic Parties have collectively left the self-employed the highest taxed, most regulatory burdened, least protected Americans. Unless a politician comes along that supports populist principles, rather than which organization will deliver votes, the self-employed will have little hope, because they lack such an institution.

When the Truman Administration extended compulsory coverage of Social Security to the self-employed in 1951, the self-employed paid the employee share of the Social Security Tax, and one half the employer share; at a combined rate equal to a flat tax of 2.25% on all earned income below $3,600. (In 1951 the maximum Self-Employment Tax was $81.) Not until the Reagan Administration came to power, had anyone dreamed that the Self-Employment Tax would rise to 15.3%. The 1983 Social Security Reform Act structurally changed the Self-Employment Tax so that the self-employed paid both the employee and employer’s share of Payroll Taxes; by 1990 the rate had nearly doubled from the 1980 rate of 8.1% to today’s rate of 15.3%. Today, a self-employed family of four making $45,000 has as their first expense a Self-Employment Tax of about $6,500.

The Affordable Care Act is a disaster for the self-employed, particularly the young. Arguably, the Democrats lost the House in 2010 because they were clueless to the ill affects on the self-employed of the Affordable Care Act, which galvanized many millions of self-employed producers and their families to vote for Republican candidates. Guising itself as a means to offer affordable healthcare to all Americans, the Affordable Care Act does not even enable the self-employed to deduct their healthcare premiums as a business expense, as can corporations. Currently, and under the Affordable Care Act as well, the self-employed must pay the Self-Employment tax on their health care premium, which translates into about $1,500 tax on a $10,000 premium.

The Affordable Care Act also does not recognize that the majority of self-employed people who have health insurance carry catastrophic health insurance with large deductibles. These policies will not be offered after the Affordable Care Act is implemented, except for those individuals that already carry catastrophic insurance and maintain it without changes. For many self-employed, catastrophic health insurance is not only what is affordable, but is also the best business decision; a decision to be phased out through the Affordable Care Act.

Less than 1/10th of 1% of Small Business Administration loans go to the self-employed in the current and proposed SBA budgets; and these loans are at rates between 8% and 13%, hardly supportive of the self-employed.

Lastly, Mr. Callahan is way off the mark when he states that the rate of self-employment has declined since 1980. Sole proprietorships are by definition self-employed. In 1980, there were 8,892,000 nonfarm sole proprietorships in the USA, by 2008 their numbers had nearly tripled to 22,614,000. In 2000, for the first time since well before passage of the National Labor Relations Act, nonfarm sole proprietorships outnumbered union membership.

Mark Dunau
www.dontsubmit.org

A lot of people are now entering the world of freelancing due to recession. We can't blame these people since they just want to earn money for their expenses. Besides, freelancing means extra cash so whenever there are emergency expenses, they are confident because they have source of income even if they are not employed. Another thing, if you are freelancing, you will find yourself having to generate estimates. Putting some room in those estimates to give you some room to breathe is essential. Check this out: Why you should always pad your estimates.

I was self-employed until I finished the ERP training and understood what things need to be changed in my consulting firm. Things started to get worse when the Affordable Care Act was signed into law, the self-employment tax on health premiums is too expensive and I can barely afford to pay for it.

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