Self-Employment in the Digital Age

“You are always self-employed. You are always the president of your own personal services corporation, no matter where you might be working at the moment.” ― Brian Tracy

Unemployment and Economic Disruption is Enacting Change

On September 27, 2020, the US Bureau of Labor Statistics reported the national unemployment rate as 8.7%, up from a record low of 2.8% back in August 2019. However, in May 2020, unemployment reached its highest level across the nation because of the COVID-19 pandemic. The April unemployment rate went from 4.4% up to an astronomical 14.7%. With 16 million filings for unemployment, this represents the highest unemployment rate recorded by a populace since 1948.

If history predicates the future, many of those currently unemployed will eventually make their way back into the workplace when the economy rebounds. The concern is when they return to work, they will find a completely different landscape that’s fundamentally and permanently changed. With increases in artificial intelligence (AI) and machine learning, automation is seeping into offices, factories, and businesses across America. It’s quite likely this “Digital Era” officially marks the end of typical employment and jobs as we know it.

Are We Developing Beyond “Lifetime” Employment?

Lifetime employment was one of the crowning distinctions of the modern Industrial Age. The post-war 1940s were characterized by steady employment, guaranteed pensions, and employer-provided benefits. As a result, millions of blue-collar American households ascended to middle-class affluence; they bought homes in the suburbs, sent their kids to college, and after 40 years of service, retired to a life of relative certainty and ease.

The white-collar professional and management class grew as well. Every now and then some observer might moan about the dehumanizing aspects of factory work or cubicle life in the corporate maze, albeit throughout history, there’s rarely been a socio-economic model that delivered so many financial benefits to so many people on such a stable basis.

However, in a world where the only constant is change, the Industrial and Information Age lifetime employment could not last forever. The power technologies that fueled the Industrial Revolution (steam, electricity, and the internal combustion engine) laid the foundation for the micro-technologies of the personal computer and the Internet, ushering in the Information Age and Digital Era. And while government policymakers may strain mightily to preserve the “old world” of lifetime corporate employment, every indication is that changes are not only on the horizon but already here. 

Given new advances in machine learning and AI, more businesses are leveraging these new technologies. They’re replacing human workers—prone to errors and requiring sick days or vacation times—with androids, chatbots, and supply chain robotics that work 24/7/365. Then, there’s data processing. AI and machine learning process data faster than humans can. And this shift to robotics is occurring in every industry.

Maybe it started with Lyft and Uber car services that replaced taxis. With more independent workers replacing typical jobs, the labor-force began a dynamic shift. Some blame the “Amazon Effect” for the rush to meet consumer demand. Others believe it’s smartphone technologies and a higher demand for automation that are future predictors of the downsizing of America. Whatever is at the root, one thing is certain–things will continue to automate.

Self Employed in the Digital Age

Going forward (if you haven’t experienced it already), these changes will have huge implications for your individual finances. In the digital economy, workers will find it to their advantage to think and act as if they were self-employed, especially with personal finance. For some, this means adopting new paradigms and gaining some different financial habits.

Fluctuating Income, Multiple Sources

Foremost, be aware that the nature of your work and income could change. You are less likely to remain in one industry, with one employer, doing one job, receiving one paycheck.

Instead, work is more likely to resemble a series of long-term, temporary assignments or “gigs” with several employers (sometimes at the same time), with periods of unemployment and self-employment. It may include long periods of uncertainty, as workers struggle to find their footing in this new economic landscape. Kai-Fu Lee, CEO with Sinovation and author of the book AI Superpowers: China, Silicon Valley and the New World Order, stated in an August 27, 2019 article that up to 50% of jobs could be replaced by AI in 15-years:

“Accountants, factory workers, truckers, paralegals, and radiologists — just to name a few — will be confronted by a disruption akin to that faced by farmers during the Industrial Revolution,” he wrote. “As research suggests, the pace in which AI will replace jobs will only accelerate, impacting the highly trained and poorly educated alike.”

Tomorrow’s workers are more likely to experience regular employment changes, and they will also encounter different forms of payment. While the government prefers making as many workers as possible W-2 employees because income taxes are withheld by the employer, the “just-in-time,” low-overhead pressures of the Information economy make it desirable for companies to limit full-time employees and out-source or contract labor.

For many, this–compounded with the introduction of AI technologies–could mean the end of regular (or at least “typical”) paychecks.

With businesses downsizing during COVID-19, more employers are cutting full-time hours in lieu of part-time workers. This move is strategic as they don’t have to offer full-time benefits to part-time employees. They can use AI to boost productivity and workplace efficiencies. AI is useful for redundant work like texting and emailing customers, tracking customer orders and deliveries, and data analysis.

Combine frequent job changes with non-W-2 compensation and the result is irregular cash flow, one of the characteristics of self-employment. Successful self-employment requires strategies to manage these fluctuations and still pay the bills.

Portable, Personal Benefits Packages

Even in holdover Industrial and Information Age jobs, the cost of providing benefits has skyrocketed (particularly for health care). Now, most employers require employees to share in the costs. Alternatively, employers reconfigure their workforce so that fewer employees are eligible for any benefits. As previously stated, part-time workers aren’t eligible for full-time benefits. The structural shift from the Industrial Age to Digital Age employment puts the responsibility for benefits more directly on the worker.

If offered, group disability and life insurance protection may be an inexpensive way to obtain income protection, although these options are usually limited to active employees – if you terminate employment, you can’t take the coverage with you (you may be able to convert life coverage to an individual policy, and yet the costs are no longer at group rates). This leaves you either hoping your new (and often temporary) employer will offer similar benefits, or hoping you are healthy enough to qualify for similar benefits on an individual basis. The older you get, the more problematic this arrangement becomes.

In the long run, securing a personally-owned package of “portable” (and permanent) benefits may be a better option, particularly for disability and life insurance, where premiums and coverages for individual policies can be guaranteed to remain the same. In addition, healthy individuals who obtain permanent coverage at a young age may realize some long-term savings if leveraging a dividend-paying cash value policy with a mutual insurance company.

Your Own Financial Management Systems

All employers are subject to regulation regarding taxes and withholding for the employees on their payrolls. This includes the requirements to pay the employer’s portion of FICA and Medicare taxes, plus withholding on income paid to employees. However, when workers are paid by the job as independent contractors or under 1099 conditions, the responsibility for these taxes falls on the worker, not the employer. And, more and more platforms are helping people shift to this self-employment dynamic.

Online job sites like Indeed, Upwork, Fiverr, Flexjobs, and Freelancer post millions of available gigs. If you’re a freelancer, you might embrace this as a stepping stone or platform to start your own business, although it comes at a cost. While you file 1099’s, you’re not deducting taxes in advance which increases the possibility that you may have to make quarterly estimated tax payments, at both the state and federal levels. (Even if you receive a W-2 for online employment, you may be considered a “non-statutory employee,” or “independent contractor” in which case the employer will not manage your withholding requirements.)

This means your tax return will probably require more than a 1040-EZ form. Without someone managing your withholding requirements, taxes can feel overwhelming and your tax obligation can feel like it’s larger. You’ll want to keep records for deductible expenses, as well as earnings.

For tips on lowering your taxes, read: “Slash Your Taxes: Tax Reduction Tips.”

Additionally, employers typically handle automatic deductions for qualified retirement plans, like 401(k)s, and often facilitate direct-deposit transactions, making it easy to execute long-term saving objectives. The concern is if you’re not eligible to participate in a company’s strategy, where will you put retirement savings – and how will you deposit the money? These issues must be addressed by your financial management system.

You are the Pension Fund Manager

Beyond finding the financial vehicle and making the deposits, you are responsible for creating your own pension income from these savings. Unlike the Industrial Era job, there are no formulas based on average salary and years of service to determine your retirement benefit with this new Digital Era.

Instead, you’ll want to research what makes sense with your personal financial objectives. We recommend whole life insurance, because it can actually provide a variety of benefits bundled in one:

• Liquid savings that can be used for emergencies, opportunities, and even “retirement income,”
• disability coverage,
• long-term care coverage,
• a death benefit to your loved ones,
• and more.

A trusted financial advisor can help you design a policy that fits your financial objectives. If we can be of help, we’d love for you to contact us.

Build Your Own Benefits Package

Consider the brief listing above of additional assignments: Insurance, Accounting, Retirement Strategies. For the typical employee in the Industrial Age, all these assignments were handled “in-house”: It was group benefits, a W-2, and a pension.

Now, the trend in the Digital Era is that these are being replaced by the individual. Not surprisingly, there hasn’t been sufficient education on how to be successfully self-employed, and many may not understand basic tax laws. Relying on online tax services can, at times, lead to mistakes and costly penalties if calculations are inaccurate at tax time. Furthermore, statistical evidence indicates that too many people are under-insured against the difficulties of life and under-funded for retirement.

This collective poor performance has compelled government officials to seek legislative fixes, using taxation and regulation to guarantee minimum levels of support. The legislative push for national health care is the most prominent example of current government initiatives.

Other items have been considered as well, including an idea to establish mandatory all-inclusive Government Retirement Accounts (GRAs) as replacements for company-sponsored 401(k)s. With Covid-19, the IRS has...

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