Back when I first started freelancing in New York City, I was puzzled at why some Off-Broadway theater companies paid me on a 1099 while others a W2. Furthermore, I was clueless as to their distinction. At the time they seemed equivalent with one exception: taxes. After all I was doing the same type of work and for roughly the same rate regardless of how I was being paid. I think most younger freelancers in the industry hold this belief today, as I keep finding out at the monthly Tinc Tuesday gatherings. It's a valid question. We can Google the difference in types of pay, but you won't find a place where it explicitly says why.
So let's put it out there ... right now ... since we're all friends. Paying freelancers on a 1099 is one of the best fiscal decisions a theater company can make. Unfortunately, the ramifications to the worker are serious and go way beyond a quarterly tax payment.
One reason theater companies love to pay on a 1099 is it attempts to limit their liability. Companies that routinely pay their workers as Independent Contractors don't have to carry a Workman's Compensation policy. If a worker is injured, then the medical bills associated with that injury are his or her responsibility and not the company's. Actual Independent Contractors, like plumbers, always carry their own. If an individual works for a company for more than 30 days in a coverage year, the company is required by law in New York State to pay into a disability fund in case that worker becomes injured and cannot work. Not true, however, for 1099 workers. It's a pretty sweat deal: No expensive policies to maintain and no hassles if someone gets injured. What's not to like?
However the liability isn't gone. Rather the theater company has made a conscious or naive decision to attempt to shift that liability to the worker. The legality is a grey area, but it is absolutely unethical. Especially when most freelancers do not fully understand the potential, though unlikely, ramifications of the situation.
Suppose, for example, a freelancer called John is injured on a call. He falls from a modest height and is rushed to the emergency room conscious though unable to walk. John has health insurance. So, what happens next? One, the health insurance company takes a dim view of footing the entire bill and passes it to their extensive, well-paid legal team. Two, the extensive, well-paid legal team quickly learns John was injured on the job and was being paid on a 1099 though he is not a legal company. The lawyers are pretty clear on the fact health insurance companies (i.e., their client) provide health insurance, not ad-hoc Workman's Compensation, even if the distinction to the rest of us is semantical. Three, they file lawsuits hoping the courts or arbitrators will find others to blame in an effort to divvy up John's expensive medical bills. Every independent entity on site is sued -- from the workers, to the venue, to the rental shops, to the theater company itself. What if a fellow electrician accidentally positioned the ladder in such a way that caused John's fall? What if the equipment failed? What if the theater company didn't order tall enough ladders and required John to stand on top? The health insurance company's legal team is going to find out who is liable. They have the money, time, and resources to make everyone's life difficult until they get their answer. If John has no health insurance, what was a $200 paycheck has turned into a debt potentially 100 times greater. So John will probably hire a lawyer. This lawyer will make large monetary promises. The process is much the same thereafter.
This scenario rarely plays out, let's be honest. It's a gamble, and one that often pays off for the theater company. If nothing happens, they win and keep the profits -- money not spent on insurance polices and the like. If they lose, the company declares bankruptcy or uses their general liability insurance to pay the damages. It's the worker, us, you and me, who get at best gets stiffed or inconvenienced, and at worst lands in some serious trouble.
Another great advantage to paying workers on a 1099 (from the company's perspective) is there are no payroll taxes. That's right, absolutely none. This saves the employer some real cash, especially over time. Social security, as with W2 workers, does not have to be matched. Plus figuring out all those federal, state, and local taxes is really hard. The formulas are complex and the rules are extensive. Usually corporations hire a HR specialist or out-source to a payroll company to handle the complexity, which cost money either in salaries or fees, that the employer must pay. By contrast 1099 checks are a no brainer: just print, sign, and mail.
It may be a no brainer for the company but not for the worker. The onus of social security is shifted to us, who must pay the share the employer opted not to. Federal, state, and local taxes must be filed and paid quarterly. Many of us need a CPA to help with that, which again costs more money. Furthermore the IRS likes standard, equal quarterly payments which is the exact opposite of how our industry works. A freelancer can be more creative with their deductions from 1099 pay, but as we discovered at a lecture on this topic the break even point is pretty high. It's unlikely any of us actually get there in any given fiscal year, especially not when the economy stinks.
So what about the safety nets most workers have access to? Sorry! Since our employers weren't paying into the Unemployment Fund we are technically not allowed to pull from it. The Unemployment Office only calculates the payout based on W2 earnings which leaves us with a smaller payout than we might otherwise expect or need. In one last blow New York City has an Unincorporated Business Tax (which I think The Freelancer's Union has or is trying to remove) which takes just a little bit more of that check away.
This is ultimately our problem; New York State (though, really, any state) is too busy or clueless to intervene. The Department of Labor has restaurant kitchens and shady construction companies to raid and they aren't equipped to handle a handful of theater or event companies shirking the law. If change happens it will be from greater education and a collective intolerance to these abusive, ethically dubious practices and the small people who perpetuate them.
It amuses me that theater ubiquitously declares itself to be a labor of love, and then so thoroughly treats its wage workers, the very ones who profess to love it so, with such vile disregard. Recently I stopped by a strike at an Off-Broadway theater. After asking a question or two, I discovered nobody in the room had any type of indemnification or legal protection. Young, eager freelancers stood on the very tops of ladders, diligently hacking away at the grid while holding on with the other hand. Then I noticed someone carefully collecting, cleaning, and filing the used gel for reuse as it came down. A clear system existed to handle and protect gel for the next show.
If only the freelancers could say the same.