Should Clients Convert Employees to Independent Contractors?
Independent Contractor Ranks
Dramatically Increase in 2021
Opportunity to Add Quality Business Clients?
Data Gleaned from Talent Lens Survey
March 6, 2022 - The world of work is undeniably different today than it was just a few years ago.
Though companies have undergone significant changes to rise to the challenges of the moment, business leaders across nearly every industry are finding that their greatest ambitions are colliding with massive shifts in the labor force.
While companies are engaged in fierce competition to acquire the in-demand skills they need to fuel growth and capture fast-moving opportunities, the best workers frequently are finding greener pastures elsewhere.
Here is a thumbnail compilation of a recent survey conducted by Business Talent Group:
- More than 4.5 million people voluntarily left their jobs in November 2021—the highest number since the US Department of Labor began keeping track two decades ago.
- With highly skilled talent desiring greater professional control and flexibility than any traditional role could ever afford, the number of independent workers surged dramatically in 2021—rising 34% to 51.1 million from 38.2 million in 2020.
- The growth is especially pronounced at the upper end, where the number of independent workers who reported earnings of $100,000 or more soared nearly 30% to 3.8 million—the most high-earning independents recorded since researchers began studying them and nearly twice the number found a decade ago
- These trends are expected to continue, with 56% of non-freelancing professionals saying they’re likely to freelance in the future.
More key insights from the 2022 Talent Lens include:
- Overwhelmingly, talent seek professional control, flexibility, and variety: According to respondents, the top reasons to go independent include picking their own projects (70%), the freedom to work from anywhere (63%), and the variety of work available in the independent market (62%).
- Talent satisfaction has rebounded: After a dip in satisfaction during the height of the pandemic, an overwhelming majority of talent (83%) now say they are satisfied with full-time independence.
- Two factors influence project selection more than any other: With the most in-demand talent weighing multiple opportunities simultaneously, 78% indicate that the type of work drives project selection, and 63% say the daily rate was a leading factor in their choice of engagements.
- Rates are on the rise: Nearly four in ten talent (39%) reported higher daily rates in 2021, and 35% of independent talent enjoyed an increase in total compensation compared to 2020.
- Most have no intention of going back to traditional roles: Less than half (43%) of independent talent say they would consider returning to the traditional workforce, and
- the odds decrease even further for elite, tenured independents. Among respondents with four or more years of independent experience beyond their successful traditional careers, 61% say they are unlikely to return to permanent employment in the next 12 months.
The Trend Brings Opportunity
As MTAP members come out of another stressful and unpredictable tax filing season and assessments of the practice begin, the growth of independent contractors and their need for business consultation and management should not be ignored. Assessing business client labor challenges that can be solved by converting employees to independent contractors or utilizing existing contractors rather than hiring it should also be carefully analyzed and considered.
It is a perfect opportunity to expand into more advisory services for existing clients and gain new business and 1040 clients providing much-needed business consultation and management services. Begin the process now by identifying business and 1040 clients who could benefit from this growing phenomena and plan post-season meetings to explore the possibilities.
And be sure you charge for your expertise throughout the process. It can create a revenue source that will grow quickly and sustain for years to come.
Should Clients Convert
Employees to Independent Contractors?
January, 2021 - When the COVID pandemic hit in full force in March 202, companies large and small were forced to move any employee who was not “essential” to a remote, work-from-home system. For many, the conversion was literally made on the fly with little preparation, so companies used existing oversight methods to manage the new “remote employees.”
Within a week after the shift, businesses faced a new reality: requiring and enforcing hourly schedules for many workers became impractical. Employees were pushing back hard against the hourly restrictions as they struggled to take care of children’s home and educational needs during the same hours they were required to work. They pushed for flexibility in completing their job tasks by showing employers those tasks were deadline-oriented and it didn’t matter when the tasks were completed so long as it came on or before the deadline. On the whole, they backed it up by not only meeting deadlines but also by doing more to ensure they had the time to deal with increasing non-work demands.
This quickly shifting landscape also presented companies, especially small companies, with an opportunity to reimagine their organizations and save money by converting employees to independent contractors. Many government and independent business tracking entities report that new business start-ups have increased during the pandemic and have exceeded numbers from 2017, 2018, and 2019. Analysts say many of the start-ups resulted from employees being switched to remote work and then deciding the independent contractor avenue was the best path moving forward.
How to Differentiate an employee from a contractor
The Internal Revenue Service differentiates an employee from an independent contractor as follows:
“An individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.“
Learn more: IRS Guidelines for Independent Contractors
More Resources for Insuring IC Designations and Compliance
Here is another good general guide that can help differentiate an employee from an independent contractor:
How to Tell if a Worker is an Employee or Independent Contractor
As a Michigan business, there are also Michigan labor laws that impact the designation of a worker as an independent contractor. Review those laws and guidelines here:
Michigan Independent Contractor Laws and HR Compliance
Probably most important, here is a website that can help you create and customize independent contractor agreements to ensure you’re legally covered should you be questioned by a government entity:
Free Resource for Creating Independent Contractor Agreements
So Should Your Firm or a Client Business Consider
Converting Certain Employees to Independent Contractors?
Perhaps!
Many of the services provided by small accounting and tax practices are deadline-driven and don’t require a pre-determined time schedule or a defined number of hours to complete. Examples could include payroll specialists, tax preparers, bookkeepers, and financial advisors/planners.
If you identify certain employees who can be converted to independent contractor status and such a conversion would be advantageous to both parties, you should not hesitate to use your business skills to best facilitate this switch by:
Offering to incorporate the employee as a business for the many tax-saving and liability-protection advantages it can bring;
Helping them create a business plan to ensure their new business’ viability, and
Helping them expand their revenue potential by connecting them with other area businesses they could also contract with for those services.
In effect, you can give them the confidence to make that switch by mentoring them through the process.
IC Conversions Could Offer a Great Business Opportunity
It’s easy to get caught up in the weeds of running your business and sometimes miss prime opportunities that could help you grow (even if when they’re right in front of you).
Not only could converting your employees to independent contractors offer an avenue to help you run more efficiently, but it also puts you in a unique position to assist clients who may be looking for the same opportunity as well.
Perhaps your clients have already thought about it or simply need to be made aware of the possibility.
You can use your experience in making these conversions to offer this valuable service to those clients (and possibly their employers) and also seek referrals to any contacts they may have who are considering the conversion. That experience would ensure compliance AND increase the chances that it would be beneficial to all parties involved.
It can also generate a very nice revenue stream into your business at a time when you can really use it.
This May not be a Viable Option for Your Firm and That’s ok!
IC conversions work under the right circumstances and with the right employees. While this conversation certainly generates some food for thought, it’s important that your firm is crystal clear on its goals, work process, and is ready to take on any potential liabilities that may be presented when you convert employees to independent contractors.
While it’s never bad to hold an entrepreneurial mindset, making calculated shifts is also KEY to success!
Have Questions
We love conversing with our membership base and being that extra voice that can help offer them clarity. Want more information about this topic? Reach out and ask us via email at staff@michigantap.net.