Two Potential Problems when Creative Agencies Work with Freelancers

Two Potential Problems when Creative Agencies Work with Freelancers

I recently was lucky enough to attend a Second Wind seminar on Agency Operations, Workflow and Efficiency hosted by Tony Mikes, a topic that was covered extensively was working with freelancers. I was surprised, as many others were, by the rules that creative agencies need to adhere to when working with freelancers in the US. A few important factors to monitor closely are taxes and the ownership of designs coming from the freelancer.

Freelancers and Taxes

There are many benefits of working with freelancers and most agencies do at some point. However, it’s important to remember that for each freelancer that you pay, the IRS wants employment taxes to be collected. They don’t care if it’s from an employer or from the freelancer as a self-employed individual, the IRS just wants to get paid. If you are working with a freelancer and they aren’t paying their taxes, it may very well be your agency that gets audited. If you end up being found liable for employment taxes, it may not be for just the one freelancer relationship that triggered the audit. The IRS may want to review the details of every freelancer you’ve ever worked with. Imagine the size of that bill.

There are a few things that you can do. Firstly, make sure that you’re working with a legitimate business entity when hiring freelancers. If there’s a legitimate business entity, they’re probably paying their taxes and you won’t have to worry. If you can’t be sure if the person you’re hiring has a legitimate business, put them on the payroll for the time that you’re working with them. I know, I know, this isn’t ideal and kind of defeats the purpose of working with freelancers but believe me, it beats an IRS audit any day. Just make sure to look at your benefits program to confirm that it is only available to full-time employees. Another option is to use a third-party employer. These companies provide an employment and payroll service for agencies using people who don’t qualify as freelancers. They’ll charge you a fee to employ and pay these individuals but again, it’s better than an audit.

Not sure if the person you’re working with qualifies as a freelancer? Below are the 20 criteria used by the IRS to determine if they would qualify (the answer to each of these should be “NO”). Take a look at how subjective some of these are and you’ll see why you might want to consider one of the tips above.

  • You or your employees instruct the individual in how, when, where and whether the work should be done. *
  • You must train the worker before the job is undertaken.
  • The individual becomes substantially part of your company operation.
  • The worker must personally perform work rather than have it done by his or her employees.
  • The worker does not have employees, i.e., people he or she hires supervises and pays.*
  • Your company has a continuing relationship with the worker.
  • You tell him or her what hours of work to follow.
  • S/he does work virtually full-time for you.
  • All the work is done on your premises.
  • S/he does not control the sequence of events to follow
  • You require frequent significant progress reports
  • You pay on the basis of time put in, rather than the type of work done.*
  • You reimburse for costs not covered by the contract.
  • You furnish the tools and equipment.
  • S/he has no significant investment in his/her own business.*
  • S/he will realize neither profit nor loss from the job.*
  • S/he only works for you.
  • S/he does not offer services to the general public.
  • You can discharge the individual.*
  • S/he can terminate the relationship without penalty.*

  *Excerpted from the CPA Client Bulletin Prepared by the staff of AICPA (American Institute of Certified Accountants)

This list is excerpted from page 210 of The Certified Agency Operations, Workflow and Efficiency Seminar Handbook

Freelancers and the Ownership of Artwork.

Another important factor to consider is the ownership of the artwork that you’re buying from the freelancer. In 1989, the Supreme Court decided that ownership of artwork is held by the author unless the piece was a “work made for hire”. Since a freelancer is not your employee, their art is not “work for hire” and they retain ownership of the artwork.

This means that you must insist that the freelancers you work with waive their ownership of artwork. You’ll want to make sure that this is clearly stated on your purchase order to them.

You most likely won’t get a lot of pushback from your freelancers on this. They’re probably just really happy to be working with you and don’t have much use for the artwork themselves anyways.

There could also be some cases (like photography) which the freelancer may to sell as artwork or “stock” work later on. In this case, you could negotiate for “use only” with the freelancer and use this point to get the price down. If you choose to do this, negotiate for “unlimited use without ownership”.

Also, it’s common for most freelancers to use representations of the work (usually not actual artwork) for their portfolio and websites to demonstrate to future customers the type of projects and quality of work they have done. Make sure to negotiate this use with them, granting (or not) “right of use” to the freelancer for the final project materials, and have it written into the contract. After all, it’s your customers’ brand that will be displayed. Sometimes, depending on the freelancer, this may involve some extra cost for you if you disallow this activity.

Key Takeaway

Working with freelancers can provide your agency with a broader availability of skill sets, lighten the load on your staff, provide some fresh perspective on projects and even ease your tax burden. It’s becoming even more common than in the past (especially with smaller agencies). Just make sure that you are following the rules and covering yourselves from potential troubles later on.

This article was contributed by former Function Point employee Marc Wilson.

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