Political discussions about the American worker almost always focus on traditional employees—people who work for a single employer, which provides regular compensation in exchange for controlling how, where, and when the employees’ work will be completed. Yet the U.S. freelancing platform Upwork has estimated that in 2021 about 36 percent of the American workforce engaged in independent work: short‐term, specific assignments from multiple clients, relatively free from the clients’ control or direction. These numbers swelled during the pandemic: The more than 64 million independent American workers in 2022 represented a 57 percent increase from 2019.
The phrase independent work often conjures images of supposedly exploited Uber drivers and DoorDash deliverers. But the IRS reports that only about 8.6 percent of all independent workers are employed in gig work—that is, work through online platforms that enable on‐demand services for the consumer and a flexible work arrangement for the provider. The most common occupations for independent workers are in marketing, communications, and computer programming. Freelance or contract work, moreover, exists in almost every industry.
Much of this work is high‐paying. The Wall Street Journal reported in 2022 that many skilled freelancers make six‐figure incomes, while sociologists Alexandrea J. Ravenelle and Ken Cai Kowalski found this year that these workers can earn $1,000 a day—or more—on various global freelance platforms. Yet policies seeking to discipline or even eliminate gig work, such as those implemented in California and recently proposed by the Biden administration, usually affect these jobs too.
Most Americans who enter independent work arrangements do so because they prefer them to the more structured and controlled world of traditional employment, not because they have no other choice. A 2021 Upwork survey found that more than 70 percent of both full‐time and part‐time independent workers see increased flexibility as the major reason for engaging in independent work. A separate 2021 survey from MBO Partners showed that nearly 90 percent of respondents were happier in independent work than in traditional jobs. It also found that roughly three‐quarters of independent workers are satisfied with their work, intend to remain in independent work, and are optimistic about their career future. Just 11 percent wanted to find full‐time traditional employment.
This preference extends to oft‐maligned gig work. According to a 2021 Pew Research Center survey, for example, almost 80 percent of gig platform workers rated their experiences positively, with almost half citing schedule flexibility as a major reason for doing the work. Only 28 percent of respondents said they performed gig work because there were few other job opportunities available where they live. And in 2019, when economist M. Keith Chen and his colleagues did a study of more than a million U.S. Uber drivers over an eight‐month period, they found that drivers valued the flexibility the arrangement provided—in both the timing and amount of work—at $150 per week (or 40 percent of expected earnings). Chen’s team also learned that drivers would need a 50 percent raise to work for a less flexible taxi company.
Beyond the simple preference among many Americans for independent work are its significant economic benefits, which include boosting entrepreneurship, dynamism, and growth. This year, business professor John M. Barrios and his colleagues showed that the entrance of new gig economy platforms in different cities increased both new business registrations and new business loans in those places by roughly 5 percent, with the effect most pronounced in economically depressed areas. Independent work also proved critical during the pandemic when, due to government restrictions or structural economic shifts, many traditional employment options disappeared.
Much of the substantial uptick in new business formations in 2020–2021, in fact, can be attributed to increasing numbers of independent workers—both individuals selling goods on e‑commerce platforms and traditional freelance workers in service sectors. This increase has not been limited to white‐collar professionals. For example, the number of new independent truck drivers increased from 43,953 in 2018 to more than 109,000 in 2021, with an estimated 70 percent of these being single‐driver operations.
In addition to the usual benefits from new competition—more choices, more innovation, lower prices, etc.—independent work has been a boon for consumers in industry-specific ways. Ridesharing services such as Uber and Lyft have reduced drunk driving and drinking‐related car crashes as more people choose to take a rideshare home rather than risk driving under the influence. Food delivery services such as DoorDash and Uber Eats helped restaurants weather lockdowns imposed during the COVID-19 pandemic, as customers turned to food delivery when dine‐in services were not allowed. More recently, new gig platforms such as Bite Ninja have helped restaurants navigate shortages of drive‐thru workers. Beyond gig work, a 2021 Mercatus Center survey found that 57 percent of tech startup executives say independent workers are an essential part of their businesses.
Despite these trends, many current and proposed laws restrict or even prohibit independent work, and politicians routinely demonize it. In 2019, California enacted A.B. 5, which expands the definition of “employee” to encompass many independent workers. Under the law, an independent worker must be free from the control of the entity for which the work is performed; must perform work that is different from the hiring entity’s usual business; and must already work in the same trade, occupation, or business as the work being performed for the hiring entity (known as the “ABC test”). If these conditions are not met, the government considers a worker to be an employee, and a host of regulations apply. A similar proposal that passed the U.S. House of Representatives in 2021—the Protecting the Right to Organize Act—would employ this test nationally to determine the status of independent workers. Today, President Joe Biden’s Labor Department is considering a rule that would enshrine as much of the ABC test into federal labor regulation as current law would allow.
Policy makers should allow independent workers to remain independent rather than forcing millions of Americans into unwanted employee arrangements. Unfortunately, many jurisdictions are following California and doing the opposite, despite independent work’s unique benefits and many Americans’ desire to pursue it. To preserve workers’ flexibility and independence, all such laws should be repealed—not merely riddled with new exceptions—and new proposals should be rejected.
Policy makers should also look to ease tax burdens on independent workers. First, to simplify tax compliance, Congress should enact a standard business deduction (SBD) that independent workers could use instead of the cumbersome process of reporting individual business expenses (such as an Uber driver’s car maintenance). The standard business deduction would operate like the standard deduction for income and would be a percentage of an independent worker’s income. Proponents of such a reform, such as the Tax Foundation and the legal scholar Kathleen DeLaney Thomas, suggest that the deduction should be 60 percent of income, while the remaining 40 percent would be taxable, a level that is comparable to average profit levels. As with employee income taxes, independent workers could choose to continue to itemize business expenses instead of using the SBD.
Second, Congress should allow companies to voluntarily withhold taxes from payments to independent workers, as is already the case for traditional employees. Companies could estimate an independent worker’s income from their platform using the 1099 tax forms and, using the new SBD, then withhold appropriate taxes on the remaining wages. (Proposals differ on the “appropriate” level of taxes withheld—based on workers’ estimates or a simpler flat rate—but this detail need not be determined here.) Voluntary withholding would further simplify the tax code and would do away with quarterly estimated payments—and penalties—for workers who choose to opt in to the system and work primarily for companies, not individuals. Thus, for example, a wedding photographer hired by an engaged couple might not have taxes withheld, but a fashion photographer hired by a magazine could opt for withholding.
Third, Congress and the states also should repeal the new $600 payment threshold for mandatory reporting of taxable income on IRS Form 1099‑K, which is unnecessary and burdensome for workers, for companies, and even for the IRS. Rather than return to the previous thresholds of $20,000 or 200 transactions, which may have missed significant taxable income, policy makers could choose a middle ground—low enough to capture taxable income from individuals frequently engaging in independent work but high enough to exempt occasional sellers and hobbyists from needless paperwork. For example, both the National Taxpayers Union and congressional Democrats’ Cut Red Tape for Online Sales Act have suggested setting the threshold at $5,000. Congress should also reinstate a set number of transactions needed to trigger 1099‑K reporting but lower the threshold to 25 or 50 transactions, thus again only subjecting those who are routinely engaged in the gig economy to IRS filing requirements.
Expanding the size and scope of health savings accounts would also help independent workers, especially those who lack health insurance or health care savings; it might also encourage “job‐locked” employees to venture out on their own. Tax‐advantaged universal savings accounts would help independent workers save for potential lulls in new business (or for any other reason). Eliminating (or at least easing) occupational licensing requirements would increase access to, and support the viability of, many independent-work professions that are currently restricted by law, such as freelance hair braiders, florists, and tour guides. And standardizing income tax and tax nexus requirements would benefit independent workers who sell their services or goods across state lines (or engage in interstate travel to do so).
Given millions of Americans’ clear preference for independent work, and given the economic benefits of these arrangements, state and federal legislators should reduce the regulatory and tax burdens on both independent workers and gig platforms.
This article is adapted from Empowering the New American Worker: Market-Based Solutions for Today’s Workforce by permission of the Cato Institute.
The post How To Empower Millions of Independent Workers appeared first on Reason.com.