Gig workers are an increasingly vital part of our workforce. In 2019, nearly 20% of small business owners reported replacing a full-time employee with a contract worker. It’s estimated that gig workers make up between 10% - 30% of the U.S. workforce. Since the pandemic, it’s likely that the number of gig workers has continued to rise.
For small businesses, gig workers can provide much-needed assistance in times of transition, such as while searching for a full-time candidate, expanding to a new location or during a seasonal sales rush. Before you hire a gig worker; however, it’s important to understand some of the tax implications and laws governing this talent pool.
Who is a gig worker?
“Gig worker” is a general term that covers many different roles and types of contracts. It can be a little tricky to determine who qualifies as an independent contractor, as there is no clear line in the Fair Labor Standards Act to differentiate between a contractor or employee.
In the eyes of the IRS, the difference between a gig worker and a full-time employee comes down to three key questions:
- Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Are the business aspects of the worker’s job controlled by the payer?
- Are there written contracts or employee-type benefits (e.g pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If you answer yes to all of these questions, it’s highly likely that the individual is an employee rather than a contract or gig worker. Consider the overall relationship and the degree to which you are directing a person in their work.
Once you’ve made that determination, the IRS uses the 1099 and the W-2 forms to separate these types of roles. The 1099-Misc is used to report payments to independent contractors or freelancers (read: gig workers) who cover their own employment taxes. A W-2 form is used for employees for whom you are withholding payroll taxes.
If you will be paying multiple contractors, you will also need to file Form 1096 with a summary of all the 1099s you prepared. This needs to be submitted to the IRS by January 31, although e-filers do not need to file a 1096.
[Read more: W-2 vs. 1099 Contractors: Tax Differences Explained]
Because gig workers are flexible and independent, they are often capable of ramping up quickly and suited to filling in when you need someone on short notice.
What are the pros of hiring gig workers?
Gig workers are often a low-cost solution to a short-term problem. If you’re looking to bring in someone with specific experience to help open a new location, run a marketing campaign or develop a new product, a gig worker can come in and work on a short-term basis. Because gig workers are flexible and independent, they are often capable of ramping up quickly and suited to filling in when you need someone on short notice.
Gig workers also tend to be more affordable. You aren’t required to pay for benefits or payroll taxes for independent contractors. Recruitment tends to be easier too, since there are many platforms and websites offering freelance workers at reasonable rates. If someone doesn’t fit into your work culture, the good news is that your team only has to work with them for a short amount of time.
[Read more: 5 Perks You Can Offer 1099 Workers]
What are the cons of hiring gig workers?
There are some trade-offs to working with freelancers and contractors that may not make these partners the best option for your business. While it’s often more cost-effective to hire a contractor, there are hidden costs involved: the time it takes to onboard someone, time lost in transitioning this person off the project, and even time lost when a freelancer has to juggle multiple clients at once.
Gig workers are less loyal to your business than a full-time employee would be. Many freelancers value the flexibility and short-term nature of contract work, and will not be as invested in the long-term success of your business.
Be aware that you might also be liable for worker safety if something happens to a gig worker on your watch. “If contractors get injured on the job, they could choose to sue the business,” wrote Square. “Employees, on the other hand, are covered by workers’ compensation insurance and generally can’t sue their employer for work-related injuries.”
Finally, how will you manage the gig worker’s contract to get the most benefit from their services, knowledge, and time? While employees are available to pitch in when needed, a gig worker is only going to make an effort according to the deliverables outlined in the contract. Hiring someone with specific expertise presents an opportunity for your team to learn a lot. Plan ahead to consider how working with gig workers will impact your business continuity.
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