Tax Codes and Work

The “Gig Economy” Collides with the Tax Code

This happens to me every year at “tax time” – trying to resolve in my mind the popular celebration of workers plying their trade in the digital economy against the tax policies that do their best to encourage them to work less.

I’m a pretty good example of the failure of the tax code to support individuals working as independent contractors. After a three-decade career in a large corporation, followed by over a dozen years on the staff and faculty of a liberal arts college, I have settled into my third career — as a writer and consultant. I work from a nicely arranged office, have the latest Apple desktop, tablet and smart phone at my fingertips, reach out to the world through high speed fiber, and have my own professionally-designed web site.

Its a good deal. I can write, publish to my own web site, and even have my work published in various newspapers and journals. I work on a contract basis for clients, and can do so from my base of operations in my home office, a commute of just a few steps.

This is perfect. It is exactly what Nancy Pelosi meant when, in supporting the Obamacare legislation, she said: “You want to be a photographer or a writer or a musician, whatever — an artist, you want to be self-employed, if you want to start a business, you want to change jobs, you no longer are prohibited from doing that because you can’t have access to health care, especially because you do not want to put your family at risk”. Unfortunately, she forgot about the tax code.

This is what Apple and Microsoft tout in all of their ads — innovation through people who are free to work independently, collaborate effectively and deliver product at lower costs. No more giant office complexes to build and maintain, no more greenhouse gases spewed forth from cars driving to work, etc. The EPA loves it. The Left loves it (cleaner), the Right loves it (independent work), everybody loves it. Until tax time, when the tax code discourages these independents to take on more work and to thereby continue to grow the economy.

Working as a sole proprietor, the tax burdens are significant. Since the federal marginal tax rate of 25% covers a huge number of sole proprietors who have taxable income between $75,000 and $152,000, let’s start with that. For this person, his income is reduced by the 25% federal tax bite, the 15.3% Social Security and medicare tax (sole proprietors pay both the employee and “employer” share of this tax), state income taxes (3.1%, in my state of Pennsylvania, but much more another states), and local income taxes (not an issue where live but it would amount to somewhere between an additional 4-7% if I lived and worked in nearby Philadelphia).

Totaling it all up, the sole proprietor sees virtually half of his income go right back out the door to various tax collectors.

Don’t get me wrong, I enjoy what I do and am happy to do it for as long as I can. But I need to make a trade off between income and free time, particularly at my stage of life. The current tax code drives my decision toward the “free time” side of the ledger — which results in less work accepted, lower billings, and lower revenues to the various governments that purport to want me to keep producing.

There is much talk in Washington of pending tax reform. Corporations will likely see a significant drop in their corporate tax rates, and there will be tax relief for “working Americans” (a term that is always ill defined by politicians). I just hope they don’t forget the Americans who are working on their own, conserving resources, and trying to serve their clients while making a living.

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