Gig Economy Continues to Grow
Tax Trap for the Unwary
For purposes of this posting, let’s define the gig economy as workers who are primarily freelancers or independent contractors who have chosen to work for themselves for a variety of reasons, which could include the flexibility to work when and where the person desires, work only on projects of interest, or for work-life balances.
The National Bureau of Economic Research reported that 95% of employment growth in the U.S. between 1995 and 2015 was in the gig economy. A study by McKinsey Global Institute found that between 20% and 30% of workers are engaged in some type of independent contractor work. Intuit, the software company that offers QuickBooks software for business owners, estimates that the number of on-demand workers will more than double by the year 2020. The study also showed that 79% of existing on-demand providers are part-time workers and that this market will grow by 18.5% a year over the next five years.
Since the majority of self-employed individuals operate as a Sch. C business, they need to realize that there are some very significant differences between a self-employed business worker and an employee working for an employer. Self-employment means that the worker is responsible for paying both income taxes and self-employment taxes (FICA and Medicare) on net earnings of the business. Since there is no employer tax withholdings, the worker needs to pay estimated taxes to the IRS. In addition, the worker must obtain his/her own insurance (liability, errors and omissions, health coverage, auto insurance, etc.). The worker may not be eligible to receive workers’ compensation or unemployment insurance (state laws differ). These workers can elect to operate as a limited liability company and can elect to be taxed as a corporation.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.