Does Minimum Wage Apply to Freelancers and Contractors?
Finances work differently when you are a freelancer. The minimum wage set by the U.S. Fair Labor Standards Act (FLSA) provides an excellent measuring stick for freelancer rates. However, freelancer finances are subject to different rules when it comes to federal, state, and municipal minimum wage laws.
When you work for a company, you are also usually given employee benefits, such as health insurance and paid time off, among other fringe benefits. When you are your own boss, you are responsible for setting prices and creating your own benefits, including liability and health insurance for your home business. In order to pay for these expenses and also make a profit, freelancers can charge more for their work than an employee receives.
With the rise of the gig economy, more and more Americans are looking to self-employment, adding gig economy jobs as a side hustle to pay the bills. Upwork is one of the leading freelance sites today, and its recent study showed over 57 million American freelancers in 2019, collectively spending over one billion hours each week on freelance work.
Because the minimum wage does not apply to independent contractors, freelancers enjoy many more freedoms, including a flexible rate schedule for their work.
Table of Contents
1099 Minimum Wage
While there is a minimum wage in the United States, freelancers fall exempt from the FLSA protections because the government classifies them differently. As a self-employed freelancer, you are considered an independent contractor in the eyes of the federal government.
Certain restrictions apply, including:
- You cannot be a permanent fixture within the client’s business;
- You cannot use certain tools or equipment to complete the job;
- You must be responsible for profit and loss;
- Your client cannot have sole authority over your work.
A 1099 form is also required if the total work is more than $600. Regardless of the 1099 form, you will still be responsible for including that income with your self-employment income.
Failure to abide by these laws is considered a violation of U.S. labor laws and can result in steep penalties and even prison time.
Can Freelancers Be Paid Less Than Minimum Wage?
Because freelancers are not protected by minimum wage, they are free to set their own prices for their work. If they charge too little, they can easily end up making less than minimum wage.
The minimum wage is intended to provide guidance regarding livable wages on both a federal and state level. It is considered the least amount of money a person can earn in order to survive in their area.
It’s important that as a freelancer, you charge enough for your services so you can still make a livable rate. As your own boss, you incur more expenses than you would as an employee.
While employers automatically make payroll deductions for Social Security, Medicare, and federal income taxes, freelancers are left to fend for themselves because they are still responsible for paying these FICA taxes.
How to Set Freelancing Rates
It can be overwhelming when trying to set rates for your services, but there are several resources to guide you in the process.
Charge Based on Experience
Your experience greatly determines what you can charge and what customers are willing to pay. It is so important that Upwork reports 78% of freelancers find soft skills equally as important as hard skills in the workplace.
Maintain a current portfolio that reflects not just your work experience, but also relevant training and volunteer work that has expanded your education.
Part of Upwork’s popularity is due to its pricing tools. With a paid membership, you are given a recommended pricing scale to submit with your bid. It helps you determine appropriate pricing based on the current market.
The Bureau of Labor Statistics is also an invaluable resource when researching job and salary information for a variety of positions.
Set a Benchmark
An important part of success is setting professional career goals, and it’s no different when you’re a freelancer.
Use the average annual income for your industry to see what the market averages, and use that to formulate your own goals for each period. By knowing what you need to make, it will be much easier to set your fees.
Networking and association groups also present fantastic opportunities for you to connect with other professionals and freelancers in your industry. Furthermore, social media is an excellent resource for finding online communities for your line of work.
Calculate Your Overhead
Just because you earn a certain amount doesn’t mean that all of that cash goes into your pocket. You must differentiate between your annual earnings and your income, the latter of which can be significantly reduced after taxes and expenses. Be sure to calculate overhead costs such as tools, equipment, internet, software, and advertising.
Your customer contracts will be a vital part of your job as a freelancer because they will guarantee your rates and provide extra protections you need for your work.
Among top industry professionals, Upwork reports that 64% choose to work independently as freelancers. It is proof that just because you freelance, you do not necessarily earn less.
Image Source: https://depositphotos.com/