Do you know the difference between employees and gig workers? Judging from recent headlines, one very large organization has been indicted for not recognizing the difference – at least when it comes to their accounting.
Gig workers are independent contractors hired to perform individual jobs called gigs. They differ from employees in that they work for themselves, even if they do similar work.
Gig work is on the rise worldwide. There are
Understand the difference between employees and gig workers
Employees, hired by an organization, are subject to W-2 reporting by their employer. They have taxes (federal, state, and local) withheld from their paychecks by their employers. They are also subject to the Affordable Care Act, FLSA, and EEOC regulations. If workers are employees, the business is responsible for withholding funds, reporting those withholdings, and in some cases, matching them. This includes income tax, Medicare, Social Security, Unemployment, family or sick leave, and garnishments.
On the other hand, gig workers or independent contractors are subject to 1099 reporting. They are responsible for filing their own income taxes and paying for their own healthcare. Their employer is obliged only to pay them for the work they do. At the end of the year, gig workers will receive a 1099 form stating how much the company paid them.
Know how to classify workers
Classifying your workers as gigs or employees is not as straightforward as you might think. Classification has nothing to do with the number of days or hours they work or if they are full or part-time, on-premises or remote, their job title, or how long they've been with the company.
The IRS uses what it calls the Common Law Test to determine if a worker should be classified as an employee or an independent contractor. The standard Common Law test indicates a worker is likely an employee if the employer controls what work is to be done and how to get it done. They will ask about:
Behavioral control - how much and what type of training is required for the job? How much does the company control how and when the work is performed?
Financial control - are a worker's expenses reimbursed? Is the worker available to do the same job for other employers? How often is the worker paid, and are taxes withheld?
Relationship of the parties - Is there a contract for the job? Is there a start and end date? Will the worker receive company benefits? Are other workers doing the same type of job?
Stiff penalties if you get it wrong
Correctly classifying workers as employees or independent contractors matters legally and financially. Making a mistake will cost you. If the error is accidental, there will be a fine of at least $50 for each misclassified worker plus 1.5% of the worker's income. If the worker is an employee misclassified as an independent, the penalty will include 40% of the FICA taxes that should have been withheld plus 100% of the matching taxes that the employer should have paid. There is also a 'failure to pay taxes' penalty for each month the mistake persists.
If the misclassification was deliberate, there will be stiffer fines and penalties. You could be penalized as much as 20% of all wages paid plus 100% of all FICA taxes, both employee's and employer's. There will also be criminal charges of up to $1,000 and a year in prison for every misclassified worker. As if that weren't bad enough, there are also state and local penalties.
Correctly report independent contractors' income
When you hire an independent contractor, you'll use a Form 1099 to report their income to the federal government. For gig workers, you'll likely use the 1099-NEC (Non-Employee Compensation.)
This form was introduced in 2020, and some businesses are still adjusting to the update. The significant change is that income paid to non-employee workers is now reported on the 1099-NEC rather than the previously used 1099-MISC.
With the introduction of the
Because we are ERP-agnostic, we can fully integrate with whichever Microsoft platform you use. We work well with the newer Microsoft platforms such as
We hope we've got you thinking about how to avoid compliance pitfalls that may come with reporting income for gig workers. If you still have questions about employees, gig workers, and taxation, or if you want experts on your side for things like Year-End Forms and payroll management,