Several articles (New York Times, Bloomberg, and Lexology) in recent days have examined the potential for gig workers to cut their taxable income by 20 percent. There is, however, a trade-off. Workers must incorporate to gain the tax cut.
Incorporating voids the argument that giggers are employees. Corporations are not employees; they operate based on mutually agreed upon contracts with another company. On-demand companies fighting regulatory scrutiny around the world are eager to resolve the question of employment status as they grow. Their future margins depend on controlling costs.
The U.S. approach, to dangle a 20 percent tax break, is attractive to on-demand companies, but will it be enough for an Uber driver or TaskRabbit tasker, among many examples, to forego the employment relationship?
A quick back of the napkin calculation suggests that a typical Uber driver, who earns $2,126 a month (Glassdoor reported average), or $25,512 a year, would retain as much as $5,102.40 a year. That is $425.20 more in earnings per month. It sounds pretty good.
Employment has other advantages, though, that offset tax savings. Losing employer health care subsidies, for instance, can increase raise the cost of health insurance by 20 percent or much more for an individual, even an incorporated individual. A contractor who paid $1,200 for health insurance for a family of four could pay $700 more monthly.
The tax break is not a guarantee of better pay for contractors who operate as an LLC or other “pass-through” entities. It makes contracting more attractive but is no silver bullet.
There’s more action afoot on this front. The Department of Labor announced last week that it is considering rules to allow individuals and small business join associations to get lower insurance prices. The catch here is that the participants must be incorporated. This is a path to lowering insurance prices, not a panacea.
Chris Opfer and Ben Penn of Bloomberg’s Labor and Employment Blog report that on-demand worker groups are skeptical of the Labor rulemaking:
“We believe it can be a good solution for our 75,000 drivers, but it’s unclear how these plans will be regulated and whether such plans could be distributed in a way that would allow members to qualify for credits under Obamacare,” [Independent Drivers Guild founder James] Conigliaro said. “An association plan couldn’t compete with a highly subsidized plan. On the other hand, drivers have special needs, and an association plan could be tailored to meet those needs and be very powerful. Either way, we’re considering a range of options.”
Giggers have many decisions about their business structure ahead.