Freelance Economy Definition

What Is the Freelance Economy?

The term freelance economy refers to a labor market consisting of a growing number of short-term contracts. Companies hire self-employed workers to undertake specific jobs in return for an agreed-upon payment, rather than offering them permanent positions. The people who do these temporary jobs are called freelancers. They may find jobs through classified ads, temporary staffing agencies, or other means.

Key Takeaways

  • The freelance economy involves hiring self-employed workers to undertake specific jobs in return for an agreed-upon payment.
  • Freelancers work for an agreed-upon price with their clients.
  • Individuals who work in the freelance economy must pay their own taxes and generally don't get vacation time, sick days, health insurance, or retirement benefits.
  • Benefits of working in the freelance economy include flexible hours.
  • Drawbacks of being a freelancer include having a larger tax bill.

How the Freelance Economy Works

The freelance economy is a portion of the labor market. Also referred to as the gig economy, companies hire self-employed individuals rather than permanent employees to complete certain duties or projects. Freelancers generally agree on a fee upfront with their clients. In many cases, they typically send companies an invoice when the work is complete in order to be paid.

Freelancers can work as many hours as they like. Some work full-time, balancing a number of different jobs for various clients or companies. Others do it on a part-time basis, which enables them to earn some extra income on the side in addition to a full-time job.

Freelancing has been around for quite some time. Unlike the regular staff at a company, freelancers are considered independent contractors. This means they are generally responsible for paying their own taxes, health insurance, and pension contributions. They also are not eligible for vacation benefits or sick leave. That's why companies generally benefit from hiring independent contractors—paying them for work without offering them any additional, costly benefits.

Freelancing is very common in a number of fields, including (but not limited to):

  • Technology
  • Education
  • Journalism and media
  • Medical and health
  • Commercial design
  • Hotel management like Airbnb
  • Taxi driving and ridesharing

Freelancers may be called temporary workers because of the nature of their tenure with certain employers.

Special Considerations

The number of people taking part in the freelance economy has skyrocketed. According to research conducted by Upwork, 36% of the American workforce was made up of freelancers in 2021, contributing as much as $1.3 trillion to the nation's economy.

The shift toward self-employment can be attributed to several factors, including an uncertain economic climate, demand for more flexible working hours, corporate cost savings, and digitalization. In fact, the internet has made it much easier for people to work remotely. This was especially true following the onset of the COVID-19 pandemic. And according to Upwork, as many as 67% of freelancers feel positive about the direction of their careers compared to 58% of non-freelancers.

The federal government and many states impose severe penalties on companies that re-classify full-time employees as freelance consultants. Some of the rules about legitimate freelancers include the need to work from an off-site location and the ability to work with multiple clients. Another requirement is that they cannot be a recent employee of the firm that does the hiring.

As many as 53% of freelancers worked as computer programmers, IT specialists, marketers, and business consultants in 2021.

Advantages and Disadvantages of the Freelance Economy

Advantages

The freelance economy gives many individuals the opportunity to pursue livelihoods that were traditionally hard to enter. For instance, taxi drivers in major metropolitan cities had to purchase or lease expensive medallions to operate a cab in the past. Drivers today only need a car and a smartphone and can take advantage of the opportunities offered by ridesharing companies.

Working freelance offers flexible hours and the chance to work from home. This allows people who participate in the freelance economy to get a good work-life balance and tailor their own work schedules to their lifestyles.

Freelancers have the freedom to deduct business expenses from their earnings. This effectively reduces their year-end tax liability and therefore, the amount of taxable income they have to pay.

Corporations benefit from the freelance economy by saving money on expensive benefits, such as health insurance, retirement savings accounts, and profit-sharing, among others. In many cases, they aren't responsible for deducting payroll or Federal Insurance Contributions Act (FICA) taxes. The onus, though, lies on the freelancer.

Disadvantages

The freelance economy has been blamed for a host of new problems. Because they don't receive company health insurance in the U.S., freelancers are forced to purchase expensive policies. They are also not entitled to vacation benefits or sick leave, which means that taking time off or dealing with an illness can cause severe financial strain.

Freelancers also pay hefty self-employment taxes and do not get matching retirement savings benefits. As a result, many financial planners worry that today’s freelance workers will not have enough retirement savings to approximate their current standard of living in old age.

Beyond the personal financial implications of freelance employment, the freelance economy has contributed to a host of larger issues. For example, Airbnb (ABNB) has led many property owners to now let out their spaces to short-term visitors. They have in effect switched from being landlords to freelance hotel operators, prompting housing shortages, as well as a rise in nuisance complaints from neighbors and concerns about criminal activity. 

Some industries are generally considered as being over-regulated. The freelance economy, on the other hand, has a lack of oversight. Similarly, the rise of the freelance economy has also affected American wages, which have been stagnant for years.

Pros
  • More opportunities to enter the workforce

  • Flexible hours and better work-life balance

  • Deducting business expenses lowers annual tax bill

  • Cost savings for corporations

Cons
  • Purchasing benefits can be costly for freelancers

  • Higher self-employment taxes

  • No employer-sponsored retirement accounts

  • Economic issues like housing shortages

  • Lack of regulation and transparency

Example of the Freelance Economy

As noted above, ridesharing is a very popular way for consumers to commute. But it also provides individuals with a way to earn some extra income. When drivers join companies like Lyft (LYFT) and Uber (UBER), they become part of the freelance economy. In order to join the roster of drivers in your area, you must meet certain criteria, including:

  • Minimum age
  • Driving experience
  • Your own vehicle
  • Proof of residency
  • Insurance requirements

Once you sign up, you must share these details with the company and download their app on your smartphone.

As a freelance ridesharing driver, you can choose when you get on the road. But there are certain factors you should consider:

  • You are an independent contractor, which means you are responsible for paying all your own taxes.
  • You do not get any vacation time or sick pay.
  • The company doesn't provide you with any retirement benefits, such as a 401(k).
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Upwork. "Freelance Forward Economist Report."

  2. The New York Times. "Airbnb's Biggest Problem."

  3. Lyft. "How to apply to become a driver."

  4. Uber. "Driver requirements."

  5. Uber. "Paying taxes as a driver and/or courier on the Uber platform."

  6. Lyft. "Tax information for US drivers."

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