Final Worker Classification Rules

Lawsuits about worker classification weren’t front-page news before Uber and Lyft started fighting traditional interpretations of the law by treating workers as independent contractors. What used to be boring hiring details are big headlines about big-name court cases fighting over whether workers are employees or independent contractors. And, as you can imagine, worker classification issues have gotten bigger as the gig economy has exploded.

Uber, Lyft, and other businesses that provide apps for gig workers fought and won legal battles to classify those workers as independent contractors, not employees. Using the independent contractor classification saves businesses money in employer payroll taxes and other employee-related expenses. Workers classified as independent contractors assume more responsibility and cost, like paying self-employment taxes and making quarterly tax payments.

Recent court rulings about worker classification have created some confusion among employers. The U.S. Department of Labor (DOL) stepped in to help businesses and workers comply with applicable tax law. DOL recently issued a final rule that takes effect on March 8, 2021, to clarify the standards for determining whether a worker should be considered an employee or an independent contractor.

Three aspects of the final DOL rules that businesses and workers should know:

  • An “economic reality” test is used to determine whether a worker is an independent contractor or is “economically dependent on an employer for work” (i.e., an employee). The rule defines two “core factors” to help businesses determine whether a worker is economically dependent on someone else’s business or is in business for her- or himself.
  • The first of the two core factors isn’t just one thing; it relates to a series of conditions. These include the degree of control of the employer over the work, the amount of skill required to perform the work, and the degree of permanence of the working relationship. For example, an independent contractor is free from the control and direction of the hirer, is sufficiently skilled to work autonomously, and is providing services that are temporary or intermittent.
  • The second core factor relates to whether the work being performed is integrated with or separate from the overall business. An independent contractor performs work that is outside the usual course of the hiring entity’s business, either a specialized skill or temporary need for additional resources.

Worker classification issues have gotten bigger, along with the expansion of the gig economy. Determining whether a worker is considered an independent contractor or an employee can be complicated, which is why DOL issued clarifying rules. Worker classification decisions assign responsibilities and costs to the employer or the worker, so it’s important to get it right.

Need more information? The IRS addresses worker classification at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.

Taxes and the Growing Gig Economy

Smartphones and apps have made it easier for people to find work, or “gigs”, through new online marketplaces. But gig workers may not understand all the tax obligations of their work situation. For example, companies will probably classify them as independent contractors instead of employees, making them responsible for taxes, insurance, and other financial obligations that employers usually take care of. 

The gig economy was growing before COVID-19. Now that work is booming because of even more gigs that are lined up via apps or websites, also called digital platforms. Examples are:

  • Driving a car for booked rides or deliveries, such as Uber and Uber Eats;
  • Renting out property or part of it, such as on Airbnb;
  • Running errands or complete tasks, such as TaskRabbit; or
  • Selling goods online, like on eBay. 

Digital platforms are businesses that match workers’ services or goods with customers. Instead of the customer directly paying the worker, the customer pays the platform, and the platform pays the worker. Platforms are supposed to issue a year-end income report to workers (i.e., on IRS Form 1099-K or 1099-NEC/MISC). Workers that earn income via a digital platform are required to maintain financial records and report all income on her or his income tax return, just like any other freelance worker. 

Knowing about the tax obligations for gig workers is vital because many don’t receive a year-end tax report, like a 1099, for all their work. Income from gig work is generally taxable, regardless of whether workers receive information returns or not. Gig workers also need to know about the business expenses they can deduct to reduce their taxable business income. 

Keeping up with the tax rules is a growing issue as the gig economy grows. The IRS recently launched its Gig Economy Tax Center to help gig workers navigate through what they need to know. Check it out here –  https://www.irs.gov/businesses/gig-economy-tax-center

The Gig Economy Tax Center is designed to make it easier for taxpayers to find information about a variety of topics including filing requirements, quarterly estimated income tax payments, and deductible business expenses. They even produced a video to break it down for you –  https://www.irsvideos.gov/Individual/PayingTaxes/UnderstandingTheGigEconomy.

The gig economy is growing. Gig workers who educate themselves on all the tax rules for reporting income and allowable business expenses can get it all done correctly and quickly, leaving more time for earning income with more gigs.

Tax Help for the Gig Economy

“Gig Economy” is in the news all the time these days. It’s also known as the sharing, on-demand or access economy. What does that term mean? The Gig Economy is a labor market that is made up of short-term contracts or freelance work as opposed to a traditional job as an employee. The Gig Economy can benefit workers and businesses by making work more adaptable to the needs of the moment and demand for flexible lifestyles. At the same time, the gig economy can come with significant downside risk, mostly for workers.

On an interesting side note, the term “Gig Economy” derives from a term used in the 1920s by jazz musicians as a shortened version of the word “engagement.” It now refers to any aspect of musical performance. More broadly, “gigging” means having paid work, often as a freelancer.

In effect, workers in a Gig Economy are more like entrepreneurs than traditional workers. While this may mean greater freedom of choice for the individual worker, it also means more responsibility. The security of a steady job with regular pay, benefits, and a daily routine is rapidly disappearing. Workers must take a much larger share of the economic responsibility for taxes, insurance and other financial obligations that employers usually take care of.

When it comes to taxes, there are a lot of rules and quite a bit to know. How can you keep up with it all? The Internal Revenue Service has created a new Gig Economy Tax Center on its website to help Gig Economy workers meet their tax obligations by getting the information to figure it out, all in one place. Whether renting out a spare bedroom or providing car rides, workers need to understand the rules so they can stay compliant with their taxes and avoid expensive surprises at tax filing time.

Educating Gig Economy workers about their tax obligations is vital because many don’t receive W-2s, 1099s or other information returns for their work in the Gig Economy. However, income from these sources is generally taxable, regardless of whether workers receive information returns or not. Workers who are gigging also need to know about the business expenses they can deduct to reduce their taxable business income.

The IRS’ Gig Economy Tax Center is designed to make it easier for taxpayers to find information about a variety of topics including filing requirements, quarterly estimated income tax payments, and deductible business expenses. But the information can still be daunting. Get help from a qualified tax professional if you don’t feel comfortable navigating it yourself. The IRS can help with that, too. https://www.irs.gov/tax-professionals/choosing-a-tax-professional