Welcome to the age of the freelancer

November 27, 2012: 11:59 AM ET

Many freelancers' incomes are on the rise and they expect good things for 2013, according to a recent survey. A look at the ups and downs of this trend.

By Gary M. Stern

FORTUNE -- More and more, it seems the early 21st century will be marked as the beginning -- or return, as the case may be -- of the era of the American freelancer.

A September survey of over 3,000 independent contractors conducted by Elance, a website that helps freelancers find work, reports that 57% of those surveyed reported an increase in 2012 income and 67% expect their income to rise in 2012.

Fabio Rosati, CEO of Elance, says that his company's site will have posted nearly 1 million freelance jobs by the end of 2012, a substantial increase from 650,000 in 2011. "Businesses are posting a record number of 'fractional' jobs and hiring freelancers suited to do the work," he says. In Elance's survey, 42% of employers said they anticipate hiring more freelancers in 2013 than the previous year.

Creative, technical, IT, and programming gigs are the fastest growing in the freelance market, according to Rosati. He says that these creative jobs often call for multimedia skills, and IT and programming often entail mobile app development. Rosati says that freelance legal and accounting workers are also in demand.

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The ranks of the self-employed have held relatively steady over the past few years. In 2009, 15.3 million Americans identified themselves as self-employed, according to the Bureau of Labor Statistics. In October 2012, 14.9 million U.S. workers were self-employed.

Employers enjoy several benefits from hiring freelancers. For one, it keeps their costs down, since consultants or temporary workers don't receive health care and retirement benefits, vacation time, and many do not require office space.

Eighty-three percent of Elance's employer clients cite speed as a major impetus to hiring freelancers. In many cases, these companies claim, projects are completed faster because freelancers bring special skills and can zero in on each job. Once a freelancer is brought on board and gets a sense of the culture at a company, firms often develop a steady cohort of independent contractors who perform work quickly, Rosati suggests.

Daniel Pink, author of Free Agent Nation, attributes the recent rise in freelancers to several factors. For one, Pink says, the "dodgy economy has made employers loath to hire full-timers." Freelancers provide "the right talent for the right task at the right time," he says. 

The rise in hiring freelancing has also transformed the social contract between worker and employee. "The reality of downsizing -- not as a one-time occurrence but as an omnipresent possibility -- has altered the bargain," Pink says.

Elance says 21% of its subscribers started to freelance after they were laid off from their jobs, while 40% started taking contract work to supplement income from full-time jobs.

While freelancers must operate without the security blanket of employee benefits like health insurance, the insecurity in the workplace, after the demise of major companies like Lehman Brothers, Borders, and Washington Mutual is pervasive, Pink says. No one's job is secure. Some freelancers contend they're safer working for themselves rather than depending on one employee.  If one client disappears, freelancers can fall back on several others.

Dan Nissenbaum, a Greenfield, Mass.-based software programmer who specializes in Java programming, spent a year working full-time at Cimex Corporation, a software integration company, in 1999, where he worked on CAD (computer assisted design). While he says he liked working at a small company, "I can't stand working in an office. It stultifies your ability to do creative work." He left the job to earn a doctorate in physics at Northwestern University and started freelancing in 2008.

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Nissenbaum possesses skills that are in demand, which separates him from other independent contractors.  Working out of his home, he says he chooses his clients carefully and finds his work satisfying.  When one client made excessive demands, he gave them the pink slip and stopped working for them.  "Telling a programmer what to do isn't effective," he says wryly.

What's the downside of freelancing? Having to pay out of pocket for benefits most full-time employees receive by default, says the 42-year-old Nissenbaum. He says he charges a higher hourly fee to cover health care costs and puts money aside for his senior years. He works mostly for one primary client, a Hollywood firm that is creating a database for their archives.

Still, he's always searching Guru and Elance for new assignments. Having to constantly pursue new work puts him on edge, but what's the alternative? "There's a lack of stability whether you're a full-time worker or a freelancer," Nissenbaum says.

Ken Lancaster, owner and creative director of Dallas, Texas-based Lancaster Advertising & Marketing, until 2004 had 15 full-time staffers, a 4,000 square foot office, and generated $3 million in revenue. He's since downsized into a 350-square-foot office and is his company's only full-time employee.

At any given time, Lancaster says he hires 15 to 30 freelance web developers, software programmers, search engine marketing specialists, and graphic designers. Some are based in the U.S., but many work out of Asia, Eastern Europe, and South America.  He's worked with some freelancers since 2004, always on a project or hourly basis.

Lancaster says hiring independent contractors has slashed his costs, produces better work at cheaper prices for his clients, and offers him more flexibility. "I don't have their payroll taxes or health insurance and my clients get more for their money. The only problem is there's no one to talk to," he notes.

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When hiring, he studies portfolios on Elance and other online sites, reviews them, asks questions via e-mail, and can interview candidates via Skype. In the past, he was forced to hire junior, inexperienced staffers he could afford and would have to spend hours training them. Now he can find seasoned contractors online, hire them online, and have them start producing immediately -- no training required.

Organizations are increasingly asking full-time employees to pay higher fees for their health care benefits and contribute a larger percentage to their retirement plans, Pink says. "The border between who's a traditional employee and who's a free agent has grown a lot murkier."

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