The Gig Economy - Implications for Businesses

The Gig Economy - Implications for Businesses

References to the "Gig Economy" are becoming increasingly frequent these days. And for good reason. According to the Freelancers Union, 53 million Americans now identify themselves as freelancers, 34% of the workforce[1]. According to a study by Intuit, the freelance workforce will grow even further to encompass up to 40% of the workforce by 2020[2]. This trend is one of the most significant shifts in the work environment in recent times, with more than 3 out of 10 workers no longer having a "traditional" relationship with an employer.

So what exactly is the Gig Economy? Simply, businesses that use non-employee workers to perform services. The workers can go by several names: freelancer, "gig-er", self-employed, moonlighter, contractor, and so on. Generally speaking, they are independent contractors paid through alternative methods to being paid through the business' payroll. For example, an independent contractor may be paid through an invoice while an employee is paid through a paycheck.

Because independent contractors are not employees, they have the flexibility to work for more than one business. They are their own boss and can take on as much (or as little) work as they desire or can find, based on what suites their lifestyle and needs. Unlike employees of a company, taxes on an independent contractor's earnings are not taken out of the payments they receive from their clients. Independent contractors must file and pay both income and employment taxes.

Using independent contractors can provide several benefits to the business including:

  • Tapping into highly skilled and specialized workers that might otherwise be unaffordable
  • Savings on employment taxes and worker's comp insurance
  • Ability to flex up for peak periods
  • Reduced employee compliance issues

Independent contractors can be a valuable, on-demand resource for businesses. However, as the gig economy has grown, so have legal challenges to the classification of those performing services. It is important for businesses to understand the difference between an independent contractor and employee. Mis-classification can result in significant fines and penalties.

Here are a few tips for businesses that use or intend to use independent contractors:

  • Have a written independent contractor agreement that specifies work to be performed, duration of engagement, nature of the relationship, and terms and conditions
  • Obtain a W9 form before work begins to ensure proper filing of the 1099 form
  • Have a clear understanding of and respect the differences between an independent contractor and an employee. The IRS provides a good definition of the difference. Click here to read more[3].

Many factors have led to the rise of the Gig Economy. Digitization and technological advancements are driving a big part of the trend by creating new services and disrupting old ones. Think Uber and Lyft. Software and apps now easily connect freelancers to potential customers of their services. Businesses are becoming more open to using freelancers. According to the Freelancers Union, more than twice of those surveyed saw an increase in their hours in the last year than those that saw a decrease[4].

The Gig Economy is a new reality in the workplace. It offers businesses and workers an alternative to the traditional employer/employee structure, as long as the independent contractor relationship is properly established.

[1] Freelancing in America: 2015 Survey - Upwork. (2016). Upwork.com. Retrieved 27 August 2016, from https://www.upwork.com/i/freelancinginamerica2015/

[2] (2016). Http-download.intuit.com. Retrieved 27 August 2016, from http://http-download.intuit.com/http.intuit/CMO/intuit/futureofsmallbusiness/intuit_2020_report.pdf

[3] Independent Contractor (Self-Employed) or Employee?. (2016). Irs.gov. Retrieved 27 August 2016, from https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

[4] 53 Million Americans Now Freelance, New Study Finds | Press, News & Media Coverage. (2014). Press, News & Media Coverage. Retrieved 27 August 2016, from https://www.upwork.com/press/2014/09/03/53-million-americans-now-freelance-new-study-finds-2/

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