Freelance Economy Definition

What Is the Freelance Economy?

The freelance economy, also known as the gig economy, is 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.

Freelancers are the individuals who make themselves available to be hired for such temporary work. They may find jobs through classified ads, temporary staffing agencies, or other means.

Key Takeaways

  • The freelance economy, also known as the gig economy, revolves around hiring self-employed workers to undertake specific jobs in return for an agreed-upon payment.
  • An uncertain economic climate, demand for more flexible working hours, and cost benefits for corporations and technological advancements have prompted the number of people working as freelancers to skyrocket in recent years.
  • Benefits of working freelance include flexible hours, the possibility to work from home, and the opportunity to deduct business expenses from earnings.
  • Drawbacks include being responsible for paying taxes and not receiving the many other benefits that accompany permanent employment.

Understanding the Freelance Economy

Freelancing is not a new phenomenon. Independent contractors have been around for decades. In recent years, the number of them has skyrocketed in fields as varied as commercial design, hotel management (such as Airbnb), and taxi driving, through ridesharing apps like Lyft Inc. (LYFT) and Uber Technologies Inc. (UBER).

The shift toward self-employment can be attributed to several factors, including an uncertain economic climate, demand for more flexible working hours, cost-savings for corporations, and digitalization — the internet has made it much easier for people to work remotely.

Half of America’s workforce is expected to go freelance within the next decade, up from 35% in 2018.

How the Freelance Economy Works

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, enabling them to earn some extra income on the side.

Freelancers generally agree on a fee upfront with clients and then, in many cases, typically send them an invoice when the work is complete in order to be paid.

Unlike permanent employees, freelancers are considered independent contractors. That means they are responsible for paying their own taxes, health insurance, and pension contributions. They also are not eligible for vacation benefits or sick leave.

Benefits of the Freelance Economy

The freelance economy has given many individuals the opportunity to pursue livelihoods that were formerly difficult to enter. For example, previously a taxi driver in many cities had to purchase or lease an expensive medallion, in effect a restricted license to operate a cab. Today drivers need only a car and a smartphone.

Working freelance also offers flexible hours and the chance to work from home. Another benefit for freelancers is that they can deduct business expenses from their earnings, reducing the amount of taxable income they pay.

In 2018, nearly 57 million Americans worked freelance, according to a survey by Upwork and Freelancers Union, representing over 35% of the entire workforce.

Criticisms of the Freelance Economy

The freelance economy has been blamed for a host of new societal problems. Freelance workers in the U.S. do not receive company health insurance, forcing them to buy expensive individual policies, nor vacation benefits or sick leave; an illness that prevents work 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 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. 

Likewise, the widespread popularity of ridesharing has been dampened by reports of unregulated drivers assaulting passengers. Where previously some industries were seen as being over-regulated, a concern with the freelance economy is a lack of oversight. Society continues to grapple with the right balance between these factors.

The rise of the freelance economy has also taken a toll on American wages, which have been stagnant for years, and the overall full-time job market as more employers shift jobs to either domestic freelancers or overseas.

Special Considerations

Companies generally benefit from hiring independent contractors. They pay them for the work they do but are not required to offer them any of the costly benefits that they are obligated to provide permanent employees with.

The federal government and many states impose severe penalties on companies that re-classify full-time employees as freelance “consultants.” Generally, legitimate freelancers must work from an off-site location, have multiple clients, and not be a recent employee of the firm.


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