Like most video production businesses of our size, we depend on freelance contractors for sound recording, TelePrompting, lighting, camerawork and makeup. It’s the most efficient way to work because we only need these services for a few days a year. But these are crucial services that need to be performed by competent people, so we work with the same people over and over again for years and they become trusted colleagues.
Recently one of our big corporate clients threw the San Francisco Bay Area video contractor community into chaos when they decided to hire all freelancers through a third party, called an Aggregator. Basically the Aggregator is whom you work for and the Aggregator resells your services to their client the corporation. It is meant to insulate the corporation from the freelancer. People had to choose (and prove) whether they are to be treated as temporary employees who get a W-2 tax form from the Aggregator (who is considered their employer), or independent contractors who get a 1099 tax form (still from the Aggregator, but in this case the Aggregator is the contractor’s “client” rather than employer). Notice how the corporation is left out of the equation. But it turns out many people didn’t understand the difference between employee and contractor, and this lack of understanding was not just from the freelance side, it was also from the corporate side. Even some of the Aggregators were a little hazy on this subject.
I’m not a financial guy by any stretch of the imagination, but I’ve been in the video production business for a long time and I think I understand this. So I wrote up what I know on the subject for our freelance group. Some of you may also find this information useful as an overview:
Why does the IRS prefer employees?
It all has to do with the IRS wanting its tax money. IRS loves employees and distrusts contractors. The IRS collects employment taxes from employers (that’s what pays for Social Security and such) as well as Income Taxes directly from you. And the IRS is afraid that contractors may cheat on taxes and reduce revenue. Employers also have deeper pockets and the IRS would love to bust a big corporation for not paying employer taxes on the people they use.
So by default the IRS would want to classify everyone as an employee. Part-time or irregular hours have nothing to do with it, you can still be an employee. You don’t get any benefits such as healthcare or retirement? Too bad, you can still be considered an employee and your employer has to pay taxes for employing you, and the employer has to take income taxes off your paycheck and have the IRS hold those taxes in your name until you file your tax return and then you may (or may not) qualify to get some of those income taxes back. That’s the W-2 form, for taking taxes off your paycheck.
What is a contractor?
A contractor is an independent operator, responsible for paying their own Social Security taxes. And they are hefty taxes, basically doubling your income taxes. (Yup, an employer pays about as much Employee taxes on your behalf as you do on your Income Taxes.) As an independent business and a contractor to major corporations, we at eIMAGE pay Estimated Taxes every quarter and hope that by the end of the year we’ve paid roughly the right amount. If we overpaid, the money comes back to us, but if we seriously underpaid, there are penalties.
If you’re a contractor, at the end of the year the company you do business with sends you a 1099 Form where they tell you and the IRS how much money they paid you in the course of the year. The IRS adds up all the money all these companies say they paid you and you’d better report at least that much money as income. (Companies who paid you less than $600/year don’t have to send you a 1099 form.)
Make me a contractor!
So you want to be a Contractor? There’s no single thing which makes you one in the eyes of the IRS. These are the factors that help to make you an independent contractor in the eyes of the IRS. The more of these you can check off, the better your claim at being a contractor:
- Do you offer the same services to multiple companies?
- Some Aggregators want to see several invoices that you’ve written to other companies for your services.
- Having only a single client is BAD.
- Do you advertise?
- Having a company website is good.
- Having LinkedIn which talks about your company is good.
- Back in the old days we used to send out postcards. If you advertised on billboards, radio, TV, that would be great, but none of us do that. But how about Google Ads (Adwords anyone?) Paying for advertising shows you’re serious about growing your business independently.
- Do you have business insurance?
- Commercial General Liability is kind of a must. About the best price I’ve heard of for real small operators (individuals) is about $500/year for $1,000,000 liability. But insurance for a business dealing with video production can be hard to find, many insurance companies don’t understand our work and there was a time I was happy to find insurance for $1,000/year and many companies quoted higher sums. “Commercial General Liability” is what many Aggregators, corporations and government entities seem to want you to have if they’re to deal with you as a Contractor.
- Commercial automobile insurance is something some clients want Contractors to have. Others simply want you to have automobile insurance without specifying. Upping insurance from normal to commercial raises annual premium by a few hundred dollars.
- Workmen’s Compensation is government-mandated insurance if you have employees but it doesn’t apply if you don’t.
- Some Aggregators are asking for other forms of insurance, such as Employer’s Liability (not sure if that applies if you don’t have employees), Professional Liability / Errors & Omissions (not a bad idea to have this and some Aggregators insist on it), and Third Party Crime Bond. See what’s required and shop around, some insurance brokers offer business packages which bundle some of these together.
- Do you have a registered Fictitious Business Name? (That’s something you get from the city in which you do business.)
- Do you have a business license and do you pay business taxes? (If the city in which you do business requires it. Sometimes the taxes are $0 for tiny businesses, but they still want you to have a Business Registration or License.)
- Do you file a Schedule C with your Income Tax? That’s for self-employed people.
- Do you set your own hours? For example, if you’re an editor, nobody cares if you edit at 3:00 PM or 3:00 AM as long as you meet deadlines. An employee works the hours he’s told to work. An interesting case is if you’re on a shoot: you’re told what the call time is and there is a set schedule that you don’t have control over. What I was told is that this is an “event”, like for example a wedding. The cake people and the flower people have to show up at the same place at the same time for the event to work, but they’re two independent businesses, not employees of the wedding. Same with our video production team, we all come together at a specific time and place to do our work because it’s a team effort and can’t be done “at our own time schedule”.
- Can you work at the place of your own choosing or does your “employer” provide an office for you? (Same issues as the “set your own hours” above.)
- Do you buy your own equipment and supplies with which to do your work? That’s a “yes” for makeup people, a little more difficult for camera operators.
- Do you have a separate business checking account in your company’s name?
There may be others, but this is what I can think of now. And if you think about it, it makes sense. If you’re an employee, you would not carry your own insurance, you would not advertise your services, you would not file for a fictitious business name, you don’t buy your own equipment.
There is no single item in this list which would either disqualify—or make you—a contractor. It’s a combination of these factors. The more of this list you can check off, the better your case for being classified as a contractor. Some Aggregators ask for three or four of the above items to prove you’re a contractor, although all of the ones we dealt with, require Commercial General Liability Insurance.
You can be incorporated as well and that would help, but there’s nothing wrong with being a sole proprietorship or a partnership.
SCORE some help
If you’re new to the business world, a fantastic resource is SCORE which stands for “Service Corps of Retired Executives.” It’s a free organization run by volunteers and funded by grants to help small businesses and freelancers. You can request mentoring and that’s a great way to get all your business questions answered for free. I learned all these basics when I first started my company in Oakland back in the 1980’s and we went back to SCORE in San Francisco many years later to be mentored and to brush up on promoting our services in the 21st Century. Truly a great (and free!) organization.
And that’s the extent of my knowledge on this subject. Hope some of you have found it useful. Good luck to you all in the new Gig Economy!