The new tax law is likely to accelerate a hotly disputed trend in the American economy by rewarding workers who sever formal relationships with their employers and become contractors.
Management consultants may soon strike out on their own, and stockbrokers may hang out their own shingle.
More cable repairmen and delivery drivers, some of whom find work through gig economy apps like Uber, may also be lured into contracting arrangements.
That’s because a provision in the tax law allows sole proprietors — along with owners of partnerships or other so-called pass-through entities — to deduct 20 percent of their revenue from their taxable income.
The tax savings, which could be around $15,000 per year for many affluent couples, may prove enticing to workers. “If you’re above the median but not at the very, very top, one would think you’d be thinking it through,” said David Kamin, a professor of tax law at New York University.
The provision may also turn out to be a boon for employers who are trying to reduce their payroll costs. Workers hired as contractors, who tend to be cheaper, may be less likely to complain about their status under the new tax law.
“Firms currently have a lot of incentives to turn workers into independent contractors,” said Lawrence Katz, a labor economist at Harvard. “This reinforces the current trends.”
But it could lead to an erosion of the protections that have long been a cornerstone of full-time work.
Formal employment, after all, provides more than just income. Unlike independent contractors, employees have access to unemployment insurance if they lose their jobs and workers’ compensation if they are injured at work. They are protected by workplace anti-discrimination laws and have a federally backed right to form a union.
Those protections do not generally apply to contractors. Nor do minimum-wage and overtime laws.
“What you’re losing is the safety nets for those workers,” said Catherine Ruckelshaus of the National Employment Law Project, an advocacy group.
Traditional full-time jobs also insulate workers against the peaks and troughs in the demand for their services. Consider, for instance, the erratic income of retail or fulfillment-center workers hired in the fall and let go after the holidays.
And because companies have internal pay scales, the lowest-paid employees tend to make more than they would on the open market.
“It used to be that companies like G.M. or the local bank or factory directly employed the janitor, the clerical worker,” Professor Katz said, noting that their pay would rise along with other employees’ when the company was doing well.
Unwinding employment relationships eliminates these benefits, increasing the volatility of workers’ incomes and magnifying pay disparities and inequality.
It’s difficult to say how many workers would choose to become contractors as a result of the new provision, which for couples frequently begins to phase out at a taxable income above $315,000. Mr. Kamin said joint filers who make close to $315,000 and could transform most of these earnings into business income would find it most compelling to make the change. (It could be more compelling still if one spouse’s employer offered the couple health insurance, which many employers provide even though they aren’t required to.)
On the other hand, many individuals fail to avail themselves of existing tax deductions, like the one that freelancers can take for their expenses, said Jamil Poonja of Stride Health, which helps self-employed workers buy health insurance. That may reflect the lack of access among lower-earning workers to sophisticated tax advice.
The tax benefit could also be offset in some cases by the need for contractors to pay both the employer and employee portion of the federal payroll tax.
Many employers are already pushing the boundaries of who they treat as employees and who they treat as independent contractors.
In theory, it is the nature of the job, and not the employer’s whim, that is supposed to determine the worker’s job status.
If a company exerts sufficient control over workers by setting their schedules or how much they charge customers, and if workers largely depend on the company for their livelihood, the law typically considers those workers to be employees.
True contractors are supposed to retain control over most aspects of their job and can typically generate income through entrepreneurial skill, and not just by working longer hours.
In practice, however, many companies classify workers who are clearly employees as contractors, because they are usually much cheaper to use. And many labor advocates say the new tax deduction will encourage more employers to go that route by giving them an additional carrot to dangle in front of workers.
“The risk presented by this provision is that employers can go to workers and say, ‘You know what, your taxes will go down, let me classify you as an independent contractor,’” said Seth Harris, a deputy labor secretary under President Barack Obama.
Anything that makes workers more likely to accept such an arrangement makes it harder to root out violations of the law. That is because the agencies responsible for policing misclassification — the Labor Department, the Internal Revenue Service, state labor and tax authorities — lack the resources to identify more than a fraction of the violations on their own.
“Your chances of finding a worker that’s been misclassified if that worker has not complained are worse than your chances of finding a leprechaun riding a unicorn,” Mr. Harris said.
David Weil, the administrator of the Labor Department’s Wage and Hour Division under Mr. Obama, believes the change will add fuel to a trend that has been several decades in the making.
During that time, as Mr. Weil documented in a book on the subject, “The Fissured Workplace,” employers have steadily pushed more work outside their organizations, paring the number of people they employ and engaging a rising number of contractors, temporary workers and freelancers.
The tax law will accelerate the shift, he said, because employers who are already keen to reorganize in this way will recognize that even fewer workers are likely to object as a result of the tax benefits.
The effect of the deduction could be especially big in industries where misclassification is already rampant.
Many small-time construction contractors hire full-time workers who should be classified as employees but are kept on as freelancers or paid under the table, said Kyle Makarios, political director for the United Brotherhood of Carpenters and Joiners of America.
Mr. Makarios said the pass-through provision would encourage even more building contractors to misclassify workers, allowing them to reduce their labor costs and underbid contractors who play by the rules.
The practice by ride-hailing companies like Uber and Lyft of classifying drivers as independent contractors has long been criticized by labor advocates and plaintiffs’ lawyers. They argue that the companies control crucial features of the working relationship and hold most of the economic power.
Neil Bradley, senior vice president and chief policy officer at the U.S. Chamber of Commerce, said that gig-economy companies classify workers as contractors when it suits the needs of their business and that he did not expect that to change. He also said he did not expect firms with traditional business models to follow suit as a result of the new provision.
“I think the decision is going to be driven by the considerations” that lawyers cite, such as the amount of control a company exercises, he said, “not by this tax bill.”
But Mr. Weil was less sanguine.
“These kinds of approaches to making it easier to slide into independent contractor status reflect unequal bargaining power,” he said. “When you add to that an additional financial incentive, you’re just unwinding the whole system.”