The Future of Work
As most of you will know I am not a fan of predictions or at least not relying on a predicted future state for decision making. However, there are bound to be permanent changes as a result of the virus and I don’t think it hurts to start thinking about how to position for them. I ran across this article (that I frankly don’t find particularly well written and containing some flawed conclusions) as a decent jumping off point for what I’ve been thinking about.
Fewer Employees and More Independent Contractors
When the 2018 Tax Cuts and Jobs Act was signed into law, it provided a tax break for most businesses in the way of the Qualified Business Income (or QBI as we talk about during tax season) deduction. Basically, overnight, a person could go from a W2 employee to a contractor doing the same job and pay significantly less in income taxes as a result of the deduction. There are lots of rules, but assuming you don’t make too much money, this is pretty much the case for my self-employed folks.
There are of course downsides that come along with self-employment. From a tax perspective, while you get to deduct 20% of your business income, you have to pay both sides of employment taxes which nets out somewhere around an additional 6% tax (depending on your tax bracket because a portion of employment tax is deductible).
Employers are also fans of contractors as opposed to employees for a number of reasons, but mostly because it saves them money. “Up to 25% of labor costs are in addition to earned wages — paid personal time off, health-care benefits, retirement plans and other additional costs.” With contractors they don’t have those expenses.
“Of the 160 million people employed in the U.S. in February, 65% had a full-time job and 33% had a contract job with a predetermined end. The average length of stay for full-time employment was 3.5 years and decreasing. The average assignment length for the contract category was 2-plus years and increasing. The new economy already was in place, waiting in the wings.”
There are no paid days off and things like health insurance are very expensive to replace if you don’t have a spouse with a group plan, but being self-employed does setup some interesting options for retirement planning and controlling your tax rate through careful tax planning.
All in, the shift from employee to contractor could be a win-win for both worker and company therefore a trend we are likely to see going forward.
A Dramatic Reduction in Facilities Budgets for Companies
“A recent study concluded that up to 40% of all jobs can be performed at home, while before the pandemic, it was estimated that only 3% actually could be done remotely.”
“This (work from home) trend was already afoot before the pandemic, but it was largely an opt-in lifestyle choice or confined mainly to the blue-collar service industry. When it came to white-collar and professional jobs, it was still the rare exception rather than the rule.”
With the pandemic having demonstrated that many companies can function as usual with remote employment, I expect working from home to expand so companies can reduce a significant line item on their budget in terms of facilities expense. This will be particularly helpful in expensive real estate markets like New York City and San Francisco.
Another benefit of this work from home trend is that companies won’t be limited to paying salaries in a particular locale. “If an employee can live in Flagstaff, Arizona, or Kennebunkport, Maine, a company would no longer need to pay for San Francisco or New York costs of living.” This may allow them to further reduce their cost of labor in addition to turning their workforces to contractors.