Tempted by the freedom and flexibility that gig work promises? Maybe you’re struggling to find traditional work and need an alternative? Either way, make sure you know the advantages and disadvantages of the gig economy before you launch a new career.
This guide will tell you everything you need to know to become your own boss, earn extra income through a few clicks, and join the growing digital economy. We’ll cover:
- What the gig economy is
- Advantages and disadvantages
- Policy changes to be aware of
- How to become a freelancer
- Filing your taxes
- Avoiding tax debts
If you find you need guidance surrounding the technicalities of gig work, we can help. Here at Defensa Fiscal Profesional, we’re experts in legal and tax matters, whether you pursue a traditional or more unconventional path.
IMPORTANT NOTICE: because of the disruption caused by Covid-19, the federal government has extended this year’s tax return deadline to July 15. Find more details here.
What is the gig economy?
Technology has continuously revolutionized our lives and — generally — improved them. The latest development in the technological saga is the gig economy.
The word “gig” dates back to the 1920s, when jazz musicians earned a living from playing their music at events. Now, it’s not just artists making money from odd jobs, but professionals too.
There are two principal characteristics that distinguish gig workers from regular workers: they’re independent and they work through the internet. Gig workers have clients rather than employers, and these clients find them through the web.
However, these types of arrangements can take various forms.
Types of gig workers
From struggling delivery drivers to wealthy freelance consultants, the gig economy is as diverse as it is thriving. The vast majority of gig workers fit into the following categories:
- Freelancers — provide a service or skill
- On-demand workers — use freelance marketplaces
- Self-employed workers — like business owners and tradespeople
- Sellers — of goods and services
Freelancers are skilled independent workers. Common freelancing jobs include writing, graphic design, and programming, but the possibilities are endless. They may get paid per hour, per project, or even a monthly retainer.
On-demand workers and freelancers may perform the same type of work — like graphic design — but the key difference is the way they’re working. On-demand workers use freelance marketplaces like Upwork and Fiverr instead of working with their clients directly. Other well-known marketplaces include Uber and Airbnb.
Self-employed workers are the traditional independent workers and existed before the “gig economy” became prevalent. They include tradespeople who work for themselves, like plumbers or electricians, and small business owners.
There are other gig economy workers that don’t fit neatly into the above categories. For instance, bloggers that earn income through affiliate marketing or social media influencers who make money from partnerships with brands.
Log into any social network — from Facebook to Reddit to LinkedIn — and you’ll find hundreds of groups full of people are selling goods, offering services, or promoting themselves. For some, it’s their full-time income; for others, a side hustle.
More than a third of US workers are now part of the gig economy — and it’s likely that this is just the beginning. Traditional employees could soon be the minority if the growth of gig work continues at its current pace.
There are predictions that the gig economy will be worth $335 billion globally by 2025, compared to just $14 billion in 2014.
This will bring enormous changes to working life as we know it, both positive and negative.
Advantages and disadvantages
As the gig economy grows, it’s becoming increasingly attractive to many people. If you could earn good money from the comfort of your own home without a boss ordering you around, why wouldn’t you?
Yet, like everything in life, it’s not all rainbows and butterflies — there are some severe downsides to the gig economy you should be aware of. That’s why we want to provide you with the full information and empower you to make the right decision.
When you work in the gig economy, you don’t have access to perks that come with conventional jobs like insurance, paid vacations, and pension contributions.
So, if you make $50,000 as an independent worker, you’ll effectively be earning less than an employee with the same salary. If you need to take a sick day or a vacation, you’ll lose money; your employed counterparts won’t.
You also must pay for your own equipment. Many employers provide their employees with laptops, stationary, or even uniforms, but independent workers must buy everything themselves. Luckily, you can deduct business expenses from your tax bill to compensate.
The gig economy also lends itself to exploitation. It’s cheaper for employers to take on contractors than hire staff, so people in certain professions may find it difficult to get work without going freelance. Worryingly, around 40% of freelancers feel they have no choice but to become independent contractors.
The word democracy is one word to describe the gig economy. Workers can choose who they work with, which projects they take on, and what platform they use. In an ideal world, both parties interact with each other respectfully and come together to solve problems.
In her book “The Gig Economy,” researcher Diane Mulcahy points out that independent contractors can access benefits like flexible work hours and autonomy.
Mulcahy also highlights that, contrary to misconceptions, the gig economy isn’t just for Uber workers — it’s also for qualified professionals like engineers, lawyers, accountants, graphic designers, and more.
In addition, there are fewer restrictions related to educational levels or professional background. Gig workers are assessed by their skills, not their professional background. Even the long-term unemployed and people in developing countries can access high-quality opportunities.
This fosters social inclusion.
The gig economy went unnoticed by policymakers for its first few years, but the tide is turning. Governments unhappy with how some companies are taking advantage of gig workers have brought in stricter legislation to combat exploitation.
Unfortunately, some policies have had undesirable consequences and threaten the livelihoods of gig workers. The most prominent example is AB5 in California, which has already changed how contractors work.
The new AB5 law aimed to support the rights of independent workers by reclassifying them as employees, giving them more access to benefits. Companies like Uber and Lyft make more money by classifying their drivers as “self-employed” so they don’t have to pay them for sick days or holidays.
However, the law has hurt many workers. Some freelancers genuinely prefer self-employment but have now lost their contracts, as their employers hired freelancers from states with less complex laws.
Since the law came into effect on January 1 of this year, many contractors have lost their jobs. For instance, Vox Media dismissed 200 independent contractors because they couldn’t afford to count them as workers. They’re just one example of many.
This may have further unexpected negative consequences. 23% of Las Vegas tourists came from California in 2019, compared to 31% in 2019; if this trend continues, the percentage could be even lower this year. Some believe AB5 is a huge factor in the drop, meaning it could be responsible for the loss of jobs, even outside of California.
Considering the 57 million independent contractors in the United States contribute over $1 trillion to the IRS each year, it’s easy to see gig economy policies could have a huge knock-on impact on the economy.
California isn’t the only area to take action. Last year, at least 15 states undertook projects to reclassify workers, including Illinois, Nevada, and Delaware.
It’s causing a stir amongst the community of independent workers, who are worried they could lose their freedom and rights if they’re classified as regular workers.
Time will tell whether the bills improve or ruin working conditions for freelancers.
How to become a freelancer
If you’ve decided that the pros of freelancing outweigh the cons, you might wonder how you can join the gig economy. Naturally, there’s a world of difference between how to become an Etsy seller versus a graphic designer — but there are a few common threads.
We’ll run over how you can get funding and handle capital, before covering taxes.
Remember analyze your options and think hard about the type of work that’s right for you. Study the field you plan to enter and seek professional advice if possible.
When you figure out the type of work you want to perform, you need to find funding. In other articles we’ve discussed ways to raise financing for businesses, like venture capital or angel investors, but these methods rarely apply
Generally, startup costs are low for gig economy workers, as long as you have a laptop and an internet connection. You might need to pay for specialist software, equipment, or accountancy fees, but other costs are limited.
However, there are a few exceptions — for instance, if you want to sell goods online, you’ll need to handle manufacturing and processing costs.
For anyone low on funds, it’s worth looking for grants. Some charities and organizations offer support for new businesses. The Minority Business Development Agency often has grant competitions for minorities and the Amber Grant funds female entrepreneurs every year.
Bootstrapping is starting your business with your own funds instead of external money. If you end up using your own savings to launch your business, don’t think of it as wasted money — assuming all goes well, you’ll recover your initial investment and generate even more income.
Take inspiration from Johnathan Grzybowski, the director and founder of marketing at Penji, who bootstrapped a company that became a 7-figure business.
Starting with your own money will give you more control over your business and stop you losing sight of your consumers and clients. Plus, they say that we value things we pay for ourselves.
You could also consider getting support from another, larger company. It’s better to avoid this if you can, since you must give over shareholder rights and decision-making power, but you might decide it’s worth it for the fast growth.
It’s not just financial capital you need to think about — consider your human capital, too.
As a freelancer, you’re selling yourself, so paying to improve your skills and knowledge is a smart investment. Whether you join a professional body, pay to take an online course, or join a networking group, these are all moves that can grow your career exponentially.
You might also grow your business by taking on further employees. It’s a risk, but if you select your new personnel carefully, it can pay off. Remember, if you’re bootstrapping, you may need to fund employee salaries with your savings to begin with.
Before you set up as an independent worker, make sure you know how to file your taxes properly before entering the gig economy or you could end up with penalties and fees. Being a freelancer does not exempt you from this responsibility.
Let’s look at which tax forms you should use, how to file taxes, and what to do if you accrue tax debt.
How to file your taxes as a gig worker
If you earn more than $400 dollars for freelance work in a year, you must pay taxes for your earnings.
The self-employment tax of 15.3% covers Social Security and Medicare. Employers deduct this automatically from the paychecks of their employees, but independent workers must pay themselves. Ideally, save 20-30% of every payment you receive to make sure you can cover your taxes when it’s time to file.
If you expect to owe at least $1,000 in taxes in a year, you need to pay quarterly taxes, because the IRS can’t withhold your earnings from every paycheck like they do with employees.
So, it’s important to stay on top of tax periods. The first quarter ends on April 15, the second quarter on June 17, the third quarter on September 1, and the fourth quarter on January 15, 2021.
If you end up paying less estimated tax than you owe, you must make up the difference at the end of the year. Conversely, if you pay too much, you’ll receive a refund at the end of the year.
You should use a Form 1040 to calculate and file your self-employment taxes. Also, each time a client pays you $400 or more, the client must fill in a 1099-MISC form detailing the payment. If they pay you via the internet and you earn $20,000 or more over 200 transactions, they should use a 1099-K form.
Schedule C forms
If a client fails to send you a tax form, it doesn’t mean you’re exempt. You still need to report your earnings to the IRS using a Schedule C form.
In Part I of the form, report all the independent income you earned during the fiscal year, including everything already reported on forms 1099 from customers. Then, detail your expenses in Parts II-V, including any deductions.
If you expect business expenses of $5,000 or less, the more simplified Schedule C-EZ might be better.
Remember, when you don’t have an employer, you’re solely responsible for controlling your finances and the corresponding taxes. To make sure you do nothing wrong, it’s best to consult with a professional.
If you don’t pay your total tax bill, you’ll end up with tax debt, which is estimated to be a $527 billion problem in the USA. There were over 13 million individual defaulters in 2018.
In 2018, there were 21 states with a tax debt below the national average. New Mexico had the lowest debt of just $13,878, followed by West Virginia ($14,325) and North Carolina ($ 14,657).
Causes of tax debt
Some believe independent contractors are part of the problem. Since gig economy workers have to file and estimate their own taxes, it’s easy for them to end up in debt by underestimating their total tax burden and failing to pay.
Wade Schlosser, CEO of the media firm Solvable, thinks the increase in the gig economy will increase tax delinquency even further.
However, there are a few other factors. Tax penalties account for 14.38% of the cases of tax debt, whilst 14.22% are because of unreported taxes and 10.79% come down to divorce.
You should avoid delaying payments or returns to the IRS at all costs. At first, you’ll only receive polite reminders, but if you continue to ignore your tax obligation, things can get worse. The IRS has the power to make the payments itself by automating your bank account, and they can also take the money from your salary or a tax refund.
You might even end up with a federal tax lien, which gives the IRS the right to seize your assets. Fleeing abroad won’t solve the problem either.
Tackling tax debt
With the 2020 tax season just around the corner, make sure you’re prepared. If you think you’re in risk of facing tax debt, there’s still time to put things right.
You can ask the IRS for an extension, which gives you an extra six months to pay what you owe. This year, the extension will have a deadline until October 15.
If you already have tax debt, you could apply for a payment plan, which allows you to make monthly payments until you settle your debt, including interest and three-year penalties.
You could also make an Offer in Compromise in extreme cases. This involves reducing your tax debt if you can prove you’re in financial hardship. The IRS considers your ability to pay, income, expenses, and asset liability.
Alternatively, you can ask the IRS for a “Currently Not Collectible status. This doesn’t stop your debt from accruing interest, but it means you won’t be made to pay the amount you owe. Your assets won’t be seized either.
In special cases, you could ask for innocent spouse relief. The IRS will release you from your liability on that tax debt, including interest and penalties, if your spouse has filed a joint return without your consent.
There are both advantages and disadvantages of the gig economy, but don’t let your fears put you off. Although not everyone is suited to becoming a freelancer or business owner, there are many benefits.
Besides, as the gig economy grows, it’s becoming the place where the best opportunities lie.
Instead of walking away, make sure you’re informed and have the support you need — we might be able to help. If you want to know more about the legal pros and cons of being an independent contractor or starting your business, don’t be a stranger. You can call us on +1 (704) 243-6333, contact us or visit our office 4801 E Independence Blvd, Charlotte, NC 28212.