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Updated: May 3, 2024

Employer's guide to gig workers and independent contractors

Published By:

David Kindness, CPA

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Gig workers are independent contractors who perform “gigs” which are short-term, flexible, on-demand jobs for one or more clients or platforms. And the gig economy keeps growing, with demand for gig work increasing by 41% from 2016 to 2023.

Fast facts about gig workers

  • The term gig worker refers to freelancers who work on short-term projects for one or more clients at a time
  • The gig economy is booming, with as many as 36% of US workers performing some form of gig work in 2022 — and that number is on the rise
  • Hiring gig workers allows businesses to hire workers on an as-needed basis, allowing them to access specialized skills and complete projects quickly and efficiently

Why are so many people gravitating toward gig work? It has become popular in large part because of the freedom and flexibility it provides. Most gig workers can work for anyone, anywhere, anytime — all at their own discretion. Because they offer specialized talent for short- to mid-term projects without a full-time commitment, gig workers are also gaining traction with business owners.

 

In this employer’s guide, we’ll get into more detail on what gig workers are, how they compare to independent contractors, and what to consider when hiring this type of help.

Getting to know what a gig worker is

In the simplest terms, gig workers include anyone who takes on temporary gigs or assignments to earn income. Though many people perform gig work full-time, others take on projects part-time to earn extra income in addition to their 9 to 5 jobs. In fact, 36% of the US workforce performed some form of gig work in 2022.

 

Instead of working set hours in designated locations, gig workers enjoy the freedom to pick their projects, hours, and where the work gets completed — often connecting with potential clients on apps and digital platforms.

 

Examples of gig workers can include the following:

  • Freelancers and independent contractors: graphic designers, photographers and videographers, writers and editors, bookkeepers, event planners, virtual assistants, and more.
  • Platform-based workers: These can include rideshare drivers, delivery couriers, fiverr and upwork users, or even Airbnb and VRBO hosts.
  • Self-employed individuals: In short, these business owners are often considered to be part of the gig economy because they usually work on short- to mid-term projects for one or more clients, and receive a Form 1099 every year.
  • Leased employees: Even though leased employees are technically employees, they often perform short- to mid-term gigs for one or more clients at a time.
  • Contingent workers: This blanket term describes all types of gig workers. We’ll discuss contingent workers in more detail a bit further below.

 

What is a 1099 gig worker?

In a nutshell, a 1099 gig worker refers to any freelancer who works on a project basis for one or more clients, is paid based on their own unique work agreements, and who receives a Form 1099 every year. Unlike regular employees who receive a Form W-2 from their employer at the end of the year, gig workers should receive either IRS Form 1099-NEC or 1099-MISC by January 31st. Why do they need this document? It’s used to report their income to the IRS, and they are responsible for paying their own taxes each quarter.

 

This graphic appears in an article about gig workers and how employers use them to complete projects.

 

Are gig workers the same as being self-employed?

Self-employed individuals and gig workers are often one and the same, but this is not always the case. According to the IRS, self-employed workers are those who carry on a trade or business as a sole proprietor, independent contractor, member of a partnership, or who are otherwise in business for themselves. This means that those who are self-employed have more control over their work processes than gig workers, could have a formal business structure in place, and often maintain more formal, long-term relationships with their clients than gig workers do.

 

Now that we better understand what a gig worker is, let’s find out how they compare with independent contractors.

Understanding what an independent contractor is

Like gig workers, independent contractors are self-employed professionals who complete projects or services for the clients who hire them, rather than working on the payroll for one employer. These contractors generally use their own equipment and work at the client’s site, not their own dedicated business premises.

 

Why do employers work with independent contractors?

When it comes to expanding their workforce, hiring independent contractors can make a lot sense for business owners for a number of reasons, including:

  • Cost-effectiveness: Hiring independent contractors can be less of an investment because business owners are generally not responsible for providing health insurance, retirement plans, office space, or work equipment.
  • Flexibility: Independent contractors allow business owners to adjust their workforce to meet changing demands without the burden of long-term commitments.
  • Specialized skills: Often, hiring independent contractors provides business owners with access to professionals who have specialized skills on an as-needed basis. This allows business owners to tap into their knowledge and experience for specific projects or tasks — and a fill a skills gap — without the need to keep them on staff permanently.
  • Reduced administrative burdens: Compared to employees, there are fewer back office tasks because they are responsible for their own taxes and legal compliance, simplifying the payroll process for business owners.

 

Independent contractors and gig workers generally share similar characteristics.  Since we are going into detail about gig workers and independent contractors, we should also cover what a contingent worker is.

What is the difference between a gig worker and a contingent worker?

A contingent worker is any worker who completes short-term assignments or provides specialized services to an organization without needing to be hired as an employee. Because “contingent worker” is a blanket term, it typically includes gig workers, freelancers, independent contractors, temporary workers, leased employees, self-employed individuals, and more.

 

In most cases, contingent workers receive IRS Form 1099-NEC or 1099-MISC (rather than Form W-2) every year, and they are responsible for paying their own taxes each quarter. Some contingent workers, such as leased employees, are employees of a professional employer organization (PEO) and are then “leased” to other companies as needed.

 

The takeaway is that from hiring gig workers to engaging independent contractors or farming out a project to contingent workers, most employers hire this type of help when they have short-term project needs or may not be ready to add full-time employees to the payroll.

 

However, there are additional reasons why employers consider gig workers to be a good fit for their business needs.

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When should I hire gig workers?

The decision to hire gig workers could depend on a number of factors, such as your business’s current workload, your hiring budget, the length of your current projects, and more.

 

In general, it can be a good idea to consider hiring gig workers when your workload is higher than your current capacity, when you’re focused on short or mid-term projects, and when you have the budget to pay freelance workers on an hourly or project basis. Hiring gig workers is a great way to fill gaps in your work capacity, get work done quickly, and keep costs relatively low.

 

Hiring gig workers can be cost-effective, as they are often paid on a per-project or hourly basis, eliminating the need for full-time salaries and benefits.

 

Do gig workers get taxed the same way as W2 employees?

If you do decide to hire gig workers, remember that freelancers are not taxed in the same way as employees. Employees receive Form W-2 each year, and their employer withholds and pays taxes to Uncle Sam on their behalf.

 

Do I send a 1099 to gig workers at the end of the year?

Freelancers, on the other hand, generally receive either Form 1099-NEC or Form 1099-MISC by January 31st of each year, and the IRS requires them to pay their own taxes each quarter, so make sure you don’t withhold or pay taxes for them (unless a tax expert says you should!). Note that the IRS only requires you to file Form 1099-NEC or MISC if you pay a freelancer $600 or more during the year. If you paid them less than $600, Form 1099 does not need to be filed, but the freelancer still has to include that income on their Form 1040 tax return.

 

Should gig workers sign contracts?

While some gigs may only require a verbal agreement or a simple written agreement, it may be worth considering signing a full contract. Taking this step can help clarify the terms and conditions of the work, including payment agreements, work timelines, and project-specific details. It can also be a “win-win” for both parties since contracts can protect both the gig worker’s and the employer’s interests while providing a clear understanding of responsibilities and expectations.

 

Should gig workers get benefits?

As you can imagine, one of the most hotly debated issues surrounding gig workers is whether they should receive benefits. While traditional employees typically receive benefits like health insurance, paid leave, and retirement plans, gig workers often lack these protections.

 

On the flip side, the gig economy was designed around flexibility and autonomy, allowing gig workers the freedom to choose the jobs they want. Mandating benefits might compromise this flexibility, so it’s important to strike a balance that protects workers while also preserving the freedom that makes gig work so attractive. Alternative solutions, such as portable benefits or a more comprehensive social safety net, could be a more equitable approach to addressing this issue.

What are the pros and cons of hiring gig workers?

Though each business has different needs, hiring gig workers comes with a number of pros and cons that companies may want to consider.

 

Pros of hiring gig workers Cons of hiring gig workers
Flexibility: can be hired as needed to complete specific tasks or projects. Increased hiring and training costs: you may have to hire gig workers more often, and each gig worker may need to be trained.
Cost-effectiveness: lower administrative and financial commitment than hiring employees. Quality control: ensuring consistent quality may be challenging when hiring multiple gig workers.
Low commitment: hiring an employee is a long-term commitment, but gig workers can be hired and let go as needed. Lower loyalty and commitment: because gig workers are hired short-term, they may not be as invested in your company as full-time employees.
Specialized skills: hiring gig workers can allow businesses to access specialized skills that they might not otherwise have access to. Potential legal issues: the legalities surrounding independent contractors versus employees can be complex and difficult to manage.

 

Moving on, let’s talk about some things employers should think about as tax time approaches.

How do you calculate taxes for a gig worker?

A unique aspect of the gig economy is that gig workers are responsible for paying all of their own taxes, whereas employers are responsible for withholding and paying a portion of their employee’s taxes. Just like employees, gig workers’ income is taxed as ordinary income. But you won’t need to prepare a Form W-2 for gig workers – instead, you’ll need to send a Form 1099 to both the IRS and the gig worker by January 31st of each year following a year they performed work for you.

 

Things to keep track of around taxes

All workers are subject to three major taxes: income tax, social security tax, and medicare tax. While managing these taxes for both employees and independent contractors might sound daunting, a good payroll software will make the process as easy as clicking a button. Let’s look at the differences between how independent contractors and employees handle these taxes:

 

Type of tax Purpose of the tax Tax rate Independent contractors Employees
Income tax Regular income taxes Depends on income Depends on income Depends on income
Social security tax Used to fund social security 12.4% Responsible for paying the entire 12.4% every year Only responsible for paying half (6.2%), while their employer is responsible for the other half
Medicare tax Used to fund medicare (public healthcare) 2.9% Responsible for paying the entire 2.9% every year Only responsible for paying half (1.45%), while their employer is responsible for the other half

 

Note: there is an additional 0.9% medicare surtax on wages over $200,000 for an employee who files as single, and over $250,000 for joint filers.

 

Independent contractors are generally required to make any necessary tax payments to both the IRS and state taxing authorities on a quarterly basis. They are responsible for paying on time, and they can be hit with penalties if they don’t pay Uncle Sam what they owe. Independent contractors can use Form 1040-ES to estimate their tax liability, and they can pay their taxes either by mailing a check or by paying electronically on the IRS website.

 

We’ve covered a lot of ground, but before we wrap up, we wanted to touch on a recent ruling from the US Department of Labor, as it may come into play if you are considering hiring either independent contractors or gig workers.

Update: new DOL ruling for gig workers

On January 10, 2024, the US Department of Labor (DOL) published a final ruling that clarifies how employers should classify a worker as an employee or an independent contractor. The ruling addresses the often serious and widespread issue of worker mistreatment by falsely treating employees as independent contractors, thus depriving them of employee benefits such as health insurance, paid leave, or retirement benefits.

 

The ruling is being referred to as the “independent contractor rule”, and it addresses six key factors that guide the determination of a worker’s status as either an independent contractor or as an employee. The six factors are (in no particular order):

  1. The opportunity for profit or loss that a worker might have.
  2. The financial stake and nature of any resources a worker has invested in the work.
  3. The degree of permanence of the work relationship.
  4. The degree of control an employer has over the person’s work.
  5. Whether the work the person does is essential to the employer’s business.
  6. A determination of the worker’s skill and initiative.

 

While the final ruling was passed on January 10, 2024, it won’t go into effect until March 11, 2024. To learn more about how it could affect your organization, read our employer’s guide to the 2024 DOL ruling.

Bottom line: Getting familiar with gig workers is worthwhile

Most employers have different hiring needs when growing a business. As organizations plan the next steps for growth, getting to know what gig workers are and how they are classified can be a good idea. That’s because companies looking for help with short-term projects but not ready to hire a full-time employee can look to the gig economy for professionals with the expertise they need without a long-term commitment.

 

Good luck as you build your team and consider the different options that are available!

 

Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.

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David Kindness is a CPA, experienced financial writer and editor, and a tax and accounting expert with 7+ years of experience. David lives and works in San Diego, California.

Frequently asked questions employers have about gig workers

  • What is the difference between gig economy and gig work?

    The term “gig economy” refers to all the work that gig workers do. The gig economy is massive, and it’s grown significantly over the last decade. According to McKinsey & Co’s 2022 American Opportunity Survey, 36% of US Americans performed some form of gig work in 2022.

  • Do gig workers pay income tax?

    The short answer is yes, gig workers are required to pay income, social security, and medicare taxes on their income. While employees only pay half of the social security and medicare taxes (their employer pays the other half), gig workers have to pay 100% of these taxes.

  • Are gig workers the same as freelancers?

    In general, yes, the terms gig worker and freelancer are interchangeable. Gig worker is a common lingo for a freelancer who works on short-term projects for one or more clients, and is paid on a project or hourly basis for their work.

  • Do gig workers have contracts?

    Hiring a gig worker may or may not require you to sign a contract with them, depending on the nature and scope of the work, the length of their potential engagement with you, and the degree to which you know and trust them. When in doubt, it’s safer to have the gig worker sign a contract, as this will help clarify your employer obligations, their expectations and responsibilities, their pay, and more.

     

  • Are gig workers right for you?

    The choice of whether to hire gig workers is one that almost every business owner will eventually have to consider. Whether they are right for you and your business depends on a number of factors, including your current and future workload, budget, and the length of your projects. Gig workers can be a great option to support your business whenever you need a little extra help.