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Gig Worker Vs Independent Contractor: Key Similarities & Differences

Explore the differences and similarities between gig workers and independent contractors, clarifying their distinct roles in the modern gig economy.

Are Independent Contractors and Gig Workers the Same?

Independent contractors and gig workers are essentially the same.

Both have the flexibility to choose their work hours and projects without being bound by long-term contracts. The IRS also views gig economy jobs as independent contractor roles, further aligning these two terms in both practical and legal contexts.

Are Gig Economy Workers Independent Contractors?

In terms of classification, many gig workers are considered independent contractors for legal and tax purposes.

This is especially true in the United States, though this has been a contentious issue in recent years. You need to look no further than the battle over Prop 22 in California to understand this point.

Originally, the US Department of Labor (DOL) in 2019 classified gig economy workers as independent contractors, which excluded them from receiving traditional employee benefits, insurance, and retirement plans.

However, this classification changed under the Biden administration. The DOL’s Wage and Hour Division retracted the earlier opinion and proposed a new categorization, treating all types of gig workers as traditional employees.

This change means that gig workers now qualify for federal labor protections and benefits, aligning them more closely with regular employees rather than independent contractors.

A gig worker is considered self-employed if their primary income is derived from the temporary work they perform independently, rather than engaging in side hustles or freelance work in addition to other employment.

Unpacking the Gig Worker vs. Independent Contractor Debate in Detail

Now that you have a basic understanding of gig workers and independent contractors, it’s time to take a closer look at each one.

We’ll delve into their classifications and business entities. We’ll also briefly discuss the top industries competing for their piece of the gig economy pie and racing to hire self-employed workers.

header image for prop 22 post on gigworker.com

Who Is Classified as a Gig Worker?

Gig workers are individuals engaged in various short-term, on-demand jobs across multiple sectors. This broad category includes drivers for ridesharing companies, food delivery drivers, freelancers in fields like graphic design and writing, and property renters on platforms like Airbnb.

Common characteristics of gig work include using online platforms or apps for job facilitation and providing services on a short-term basis without long-term contracts.

Key types of gig workers are temporary workers, online platform workers, on-call workers, independent contractors, and contract firm workers. The diversity in their professions and the temporary nature of their engagements are defining traits.

Gig Worker vs Independent Contractor Taxes

Tax liability is one of the most important aspects of working that gig workers and independent contractors have to manage.

Since both types of work are not considered employees, they are responsible for recording their finances and paying taxes independently.

They are considered 1099 contractors and not W-2 workers.

W-2 workers have taxes automatically withheld from their pay, whereas gig workers and independent contractors have to set aside money each year to contribute towards taxes.

Additionally, gig workers and independent contractors can take advantage of investing money into retirement accounts such as SEP-IRAs, Solo 401Ks, etc.

These accounts are designed for gig workers and independent contractors to help them save for retirement while saving on taxes as well.

Gig workers and independent contractors have to report their income, pay taxes on it, and manage deductions. They are required to make estimated payments directly to the IRS and pay for state and local taxes.

Independent contractors and gig workers must pay taxes on their income, and they can deduct business expenses such as office supplies, travel costs, and other business-related items.

Additionally, gig workers may be able to deduct certain expenses related to their gig work, such as vehicles or equipment.

The claims gig workers can make depend on the job they are doing and vary widely from person to person.

Choosing Business Entities For Gig Workers and Independent Contractors

There are four types of business entities: partnerships, corporations, limited liability companies (LLCs), and sole proprietorships.

If you don’t file any business formation documents with the state you’re residing in, then you’re automatically classified as a sole proprietor. Hence, as a gig economy worker, your business entity is a sole proprietorship, which is essentially how gig workers are classified.

It doesn’t matter whether you’re a rideshare driver, Tasker, or do some dog-walking during the weekends. All that matters is that your personal assets aren’t part of a registered company.

In other words, there’s no legal distinction between you and the business. Leaving your assets exposed like this could increase your chance of personal liability.

For low-risk gig jobs, however, like freelance writing or photography, setting up your business as a sole proprietor is safe, secure, and makes more sense.

Independent contractors operate pretty much the same way as gig workers. Both own their business and their assets, which means they’re, by default, categorized as sole proprietors.

Although, many independent contractors have recently started to form single-member limited liability companies (SMLLC). These allow them more leeway when setting up their business.

Gig Worker vs. Independent Contractor Doing the Work

Gig workers are classified as independent contractors, or 1099 contractors, for tax purposes. This is because both receive 1099 forms when employed by a company to do any type of on-demand service.

They never become at any time a direct employee of that company. This means they have to pay self-employment tax and send in estimated tax payments four times during the year.

They also have a few other characteristics in common, such as more flexibility and lenient scheduling. Although, there are a couple of features that set them apart in practice.

For example, the basics of gig work is that it’s task-specific and only short-term. These types of jobs don’t come with any commitments, leaving the workers free to pursue various other tasks simultaneously.

You’ve probably noticed the endless array of gig economy jobs to choose from. Yet, three industries in particular are capitalizing on the huge potential of this booming labor market:

  • Delivery drivers
  • The healthcare sector
  • Professional home services

Independent contractors are also hired to do specific tasks, but for an extended period. Thus, they have longer-term contracts compared to gig workers.

The top 10 industries considered to be the biggest employers of independent contractors include:

  • Research Analyst
  • Education and training
  • Medical and health
  • Customer service
  • Accounting and finance
  • Computer and IT
  • Software development
  • Administrative
  • Project management
  • Writing

Frequently Asked Questions

Do Gig Workers Need an LLC?

No, gig workers can easily set up their business as a sole proprietorship. However, if a gig worker earns an exponentially high income on their 1099, then an LLC can save them money on their tax bills. It can also protect their assets and minimize personal liability.

How Do You Prove Income for a Gig Worker?

Proving income as an independent worker can be tricky. It requires more preparation than full-time employees whose employers provide all the necessary paperwork like W-2 forms.

Though, when you’re self-employed, you don’t receive W-2 forms to prove income. Instead, you can use other forms like 1099 and 1040 forms.

Wrapping Up

Having a clear vision of what’s required of a gig worker vs independent contractor ensures that expectations are met to the fullest. Companies can take advantage of the rapidly growing gig economy while self-employed workers can enjoy doing meaningful work with better scheduling and more flexibility.

Are you a gig worker or an independent contractor? Tell us about it.

Do you have any questions about any of the points mentioned in this post? Write them down in our comment section below.

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