Responding to the growing gig economy
When Amy Northard, CPA, left a traditional accounting firm to open her own practice geared toward self-employed creative types, she had no idea if there was enough demand to keep her busy.
Six years later, her Indianapolis-based firm — marketed online as "accountants for creatives" — has carved out a niche serving creative entrepreneurs from working artists to wedding photographers and web designers. The firm has doubled in size every two years and now employs three other full-time workers, including two additional CPAs, and a part-time staffer to handle the tax needs of clients from across the country.
"I didn't ever think the business would be big enough to basically support four adults full time," Northard said. "I'm just excited to see where it goes."
Northard's firm has tapped into a growing piece of the American labor market: those who work as independent contractors or freelancers or are otherwise self-employed. Nearly 42 million Americans were classified as independent freelancers or contractors in 2018, with 3.3 million reporting income of more than $100,000 a year, according to a 2018 report from consulting group MBO Partners.
Sometimes referred to as the "gig economy," the growth of contracted services and jobs can mean people's livelihoods are coming from a range of places. On the lower-skilled end, it's people who are driving for Uber or Lyft to bring in extra cash, serving as virtual assistants, or renting out their houses on Airbnb. On the other end of the spectrum are highly compensated individuals like business consultants or federal government contractors performing key tasks.
U.S. economists Lawrence Katz and Alan Krueger found those working in nontraditional arrangements — defined as self-employed, freelancers, contractors, on-call workers, and temporary help agency workers — rose from 10.7% of the overall workforce in 2005 to 15.8% in 2015, according to a working paper published by the National Bureau of Economic Research.
While it's hard to make any sweeping statements about a group present in every industry and at every skill and income level, this growing segment of the labor force by and large can mean opportunities for interested CPA firms, given that individuals' tax situations become more complex once they come off a payroll and become their own boss.
Following is advice from Northard and other CPAs on how to attract and serve this subset of clients.
Expect clients who are new to working with CPAs
Many come to Northard's firm not knowing precisely what they want, so she offers a free 15-minute phone consultation to get a deeper understanding of prospective clients' needs before talking them through the various levels of help her firm can offer.
"A lot of times they just know or have been told they need to find a CPA, but they don't know what they need their services for," Northard said.
She also designed her firm website with her target clientele in mind — people who love what they do but don't necessarily love the financial bookkeeping part of owning their own business. "It gives the creative people a calm feeling that I understand them and get the creative side of things," Northard said.
Provide different types of interactions
Katie Mongelli, CPA, the owner of Monarch CPA Services in Rockville, Md., uses more casual ways to deliver information and educate clients, including hosting Facebook Live sessions where she tackles scenarios common to her clients in the independent and government contracting world.
She usually maps out the basic topic and thoughts on how to approach it before the session, and then dedicates 10 to 15 minutes to the session itself. Keeping it short is key, she said, pointing out that few people want a lengthy explanation of the ins and outs of tax law.
Topic ideas also come from clients, as was the case when a client recently had a question about whether forming a limited liability company would help save on taxes. Mongelli realized many of her other clients working as independent contractors or freelancers might have similar questions, and she hosted a Facebook Live tutorial to help people navigate that decision. She has hosted other sessions on best practices for organizing tax documents, which Mongelli said has been helpful to her when clients come in with their documents in order.
Mongelli also has learned that even if people aren't commenting and interacting directly during the Facebook session, they are listening. Calls from existing and new clients frequently come in after she has hosted a session.
"I see an uptick in people reaching out to me after I go live," she said.
A number of tax-related topics should be discussed with clients in the gig economy. Among the biggest needs for the self-employed are maximizing and substantiating their business expenses, such as work-related mileage, home office space, business meals, and startup or other expenses, said William Hesch, CPA/PFS, J.D., whose Cincinnati firm advises small business owners and individuals.
There is also the issue of whether they are truly self-employed (i.e., an independent contractor) or whether they could be classified as an employee. Every client will be different, and it's important to take time to understand the particular scenario to determine whether a worker is an employee or an independent contractor, Hesch said, especially because the determination is fact-based and complex.
And for self-employed clients, there is also the question of whether their activity rises to the level of a trade or business, especially if it is an activity they enjoy doing. With hobby losses no longer deductible (through 2025), it is more important than ever for clients to be able to establish a profit motive.
CPAs can emphasize to their clients that they can help navigate these thorny tax questions better than a quick internet search can.
Clients will be on sounder legal footing with the IRS, and they'll also likely maximize their tax deductions and save money, Hesch said.
There's a huge advantage to targeting a particular industry or type of worker, as Mongelli has found with her work with federal government contractors. Mongelli is able to conduct the specialized Defense Contract Audit Agency (DCAA) audits required by the Defense Department and is well versed in other compliance regulations. She also helps advise clients applying for government contracts as service-disabled veteran-owned, female-owned, or historically underutilized small businesses, for which the federal government sets aside a percentage of small business contracts in the bidding process.
She said clients have come to her after learning that their previous accountants, whom they were otherwise happy with, weren't qualified to conduct the specialized audits.
Be ready to answer contractor or employee questions
There's another side of the coin that CPAs can help with, and that's working with business owners to assess whether the people they're paying should be considered and treated as employees or independent contractors.
Hesch said he often helps business owners think through that and explains the process to switch over if they've been doing it the incorrect way.
"They really do need to treat their employees properly," he said. "There's a lot to lose."
Remember that small jobs aren't insignificant
Some of Mongelli's clients in the Millennial generation refer to contract work they do in addition to a W-2 job as a side hustle, Mongelli said.
It's a playful way of describing the work, she said, but it downplays the strategic importance and potential of having multiple income streams while building a career or business. A big reason workers take side work is they think their current 9-to-5 job isn't a final destination, and having a side business, even if small, offers a way to quickly shift gears if need be.
"It's their way of staying in touch with their own marketability," she said. "It's their own insurance policy."
Northard said she and those in her firm approach those jobs with respect, something that her clients say hasn't always happened at previous firms. What starts out small can end up being a lot bigger, she said.
"A lot of these businesses, I've watched them grow into half-million-dollar businesses," she said. "We've been able to keep them with our firm."