Independent Contractors Are Becoming Mainstream in the Workforce

Way back in 2015, we wrote a blog about the Pros and Cons of Hiring Contractors vs. Employees. In this article we shared that experts predicted by 2020 contractor workers or freelancers would make up half of the full-time workforce. This trend, now commonly referred to as the “Gig Economy” is on track to meet that prediction by 2020 or before. Are you on board?

The rules for an independent contractor or freelancer are different, but you still need to properly account for them in your bookkeeping and issue forms and reports at the end of the year! writer, Erika Fry, wrote an article, The Gig Economy Isn’t Just for Startups Anymore, in August of this year talking about how large enterprises are now embracing freelancers, also known as gig workers. She reports an interesting statistic from University of Oxford economic sociologist and associate professor, Vili Lehdonvirta. He is studying Fortune 500 firms adopting online freelancing platforms and says that the total number of projects sourced through freelancer platforms has increased by 26% in the last year.

While retaining talent and protecting proprietary information are two reasons large firms might seem to reject gig workers, he says that “values are shifting; large firms have begun to appreciate more “permeable borders” and to see freelance workers as a source of fresh ideas and “knowledge transfer” from the wider world.”

Fry notes that “corporations are also looking for more flexible and low-cost ways to hire.” Since businesses do not deduct or pay employee taxes for independent contractors, there is a savings cost. Many corporations will build a bank of freelance workers to call on as needed. Kind of like “employees on call,” without the responsibility of employees. Of course, in that situation the contract worker can decline any work or jobs that do not fit into their skill set or schedule.

Both workers and employers must evolve

While corporations are using more and more contractors, it appears that the use is to complement the existing in-house employees, not replace them. While this may be true, it is commonly known that workforces have been reduced. Fewer employees are taking on more work demands and in both old and new roles.

For those who freelance, there are risks, especially in regard to benefits and taxes. Freelancers must provide all their own “benefits” and pay their own taxes. If a contractor has skills that keeps their services in demand, the market is booming. If not, skills need to be learned, and often those skill must include skills in operating your own business, because they are essentially solopreneurs, or even small business owners, hiring employees or other contract workers.

Yes, the structure of the workforce is evolving and workers – and employers – are going to have to evolve, too.

Employers will have to continue to comply with the IRS rules in regard to identifying the proper worker classification. (If you have questions about how to differentiate between the two, please refer to another of our blogs, Choosing the Correct Worker Classification is not a Choice). Improper classification can be a very costly, and potentially business-busting ordeal with heavy fines and penalties.

Your responsibility as an employer

Beyond identifying whether the worker is truly an employee or an independent contractor, you, as the employer will have to report their wages, taxes withheld, and benefit information, at the end of the calendar year. Just because a worker is not an “employee” does not mean you write a check for an invoice and let it go. No, if you have paid any worker a total of $600 or more during the year, a Form 1099 must be sent to them and then reported to the IRS. It is just like you are required to report employee earnings in a Form W-2 and then report that to the IRS. There are deadlines must be strictly met.

Several of The Payroll Department clients have just employees, some have just independent contractors, and many have a mix of both. When small business owners think contract workers are just another invoice to pay, we get a panicked call in January when they learn about the reporting requirement.

In fact, that is one of the reasons why we began offering bookkeeping services to our clients. When contractors are paid off invoices, they must be properly accounted for in the books of a small business. Grace Walker, our bookkeeping expert, understands not just general bookkeeping, but the intricacies of accounting for workers of all sorts, including independent contractors, and the payroll tax and reporting requirements.

Some owners think they are savings themselves some cost and complexity by hiring freelancers and independent contractors, but they soon discover that this type of worker brings their own set of complexities to bookkeeping and payroll.

As your business grows and evolves, so will your workforce, and The Payroll Department is here to help you move through the changes and remain in compliance with state and federal regulations. We work with you to get everything set up and processed quickly, easily, and accurately. We promise to take away the worry so all you have to do is work on growing your business – just what you want to do!

Call Teresa Ray today at 317-852-2568 for a consultation to see how we can help you with your payroll and bookkeeping needs.

-Elaine of The Payroll Department Blog Team

Posted in: Bookkeeping and Accounting, Operating a Small Business

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