The workplace is rapidly evolving, and gig work is on the rise. Right now, 36% of American workers do gig work as either a first or second job, which amounts to nearly 60 million workers in the US alone. By 2023, we can expect 52% of American workers to either be gig workers or have worked in that capacity in the past (source). But gig work means unique tax compliance challenges for employers. How can you be sure you’re staying compliant as the workforce trends more gig-like?
Be sure you know the difference between an employee and a gig worker. Employees are subject to W-2 (federal, state, and local) reporting and have employment taxes withheld from their paychecks by employers. They are also subject to the Affordable Care Act, FLSA and EEOC rules. Gig workers or independent contractors, by contrast, are subject to 1099 reporting and are responsible for their own income taxes and healthcare.
Be sure you are classifying your workers correctly. If a worker is an employee, you are responsible for withholding, reporting, matching (where applicable), and remitting employment taxes for that employee. This includes income tax, Medicare, Social Security, Unemployment, family or sick leave, and garnishments. If a worker is a gig worker, you as the employer are responsible only for paying them for their work and issuing a Form-1099 to them at the end of the year for their own tax purposes (this will likely be a 1099-NEC, for “non-employee compensation”).
So how do you know which one a worker is? It’s not as simple as just declaring them one or the other. There are ways to determine whether your worker is an employee or a gig worker. The Common Law Test is the usual way to do it, using three factors: behavioral control, financial control, and relationship of the parties. Behavioral control includes the answers to questions like, is training expected for this worker? How much control does the company have over how the job is done? Financial control considers whether a worker’s expenses are reimbursed by the company, whether the worker can do the same job for the public while still working, whether the worker can lose money as a result of the work performed, how often the worker is paid, and whether taxes are withheld. Relationship of the parties considers a further few factors: Is the work performed under a contract with a set start and end date? Is the worker eligible for company benefits? Is the job an “important aspect of business operations” for the company? Are there other workers at the company doing similar work?
Note that classification of a worker has nothing to do with how many hours someone works, whether they are part-time or full-time, how old they are, whether they are remote or in-office, what position they hold, or how long they’ve worked for you.
Be sure you know the penalties for getting it wrong. If you think it’s no big deal to misclassify workers, think again. Doing it by accident incurs fines of $50 per misclassified employee, plus a penalty of 1.5% of the worker’s wages, plus 40% of the FICA taxes that weren’t withheld from the employee, plus 100% of the matching FICA taxes that you should have paid as the employer. You’ll also have to pay a “failure to pay taxes” penalty that is 0.5% of your unpaid tax liability for each month, up to 25% of your total tax liability.
If you misclassify workers on purpose, you’ll pay additional penalties and fines, such as 20% of all wages paid plus 100% of all FICA taxes, both the employee’s and the employer’s. You’ll also face criminal penalties of up to $1,000 and a year in prison for EACH misclassified worker. And those are just the federal penalties – states can have their own, too. Clearly, it’s important that you avoid misclassifying your workers!
Be sure you know how to report gig workers’ income properly. When you employ a gig worker, you use Form 1099 to report their income to the federal government (and to them). Most businesses are very familiar with 1099s, as they’re used for a variety of reporting at year-end. The one most likely to be used for gig workers, as noted above, is Form 1099-NEC. This form was new for 2020, and it brought some headaches as companies got used to the updated process. Simply put, this form exists for reporting money paid to workers who are not your employees. It also means that non-employee compensation is no longer reported on the 1099-MISC as it used to be. This is a pretty big change, so be sure you’re doing it correctly for your gig workers and contractors!
Now you have the information you need to avoid many of the compliance pitfalls that the gig work economy could create for your company. If you still have questions about gig workers and taxation, or if you want experts on your side for things like Year-End Forms and payroll management, click the button below to learn more about Greenshades and schedule a demo!