By Mark D. Rich, CPA, CFF
Special Feature: CLE Article #15*
I was a “gig” worker in the ‘60s; the platform consisted of advertisements targeting kids for hire on the back page of comic books; the product was a popular weekly newspaper sold door-to-door. Most of my earnings from that gig work went towards more comic books. In college, I was literally working gigs as a drummer for a few different bands. I never thought about why we called them gigs, I just knew that gig opportunities didn’t pay very well, especially after the band split the money at least four ways. My experience as a gig worker was indeed fun, but not very profitable. There just wasn’t a good cost-efficient way to get the word out to advertise talent and availability. A lot of things have changed in that regard. Gig work in today’s economy utilizes many available computerized platforms and apps to promote and match talent with the need for talent.
So, what exactly is this “Gig Economy” that many of us have participated in over the course of our lifetime? Historically, the term “gig” has been used by musicians putting together a group to play at one-time engagements called a gig for short. Businesses in need of professionals are moving towards the gig approach as an option because the workforce is now able to work virtually to pick and choose various times, various projects with various businesses. Technically, the term “gig worker” is just another name for an independent contractor. The classification as “self-employed” is a general term the IRS commonly uses.
Gig work can be arranged by simply utilizing a social media account to put your talent out to the public; or a formal platform that matches a worker with a customer (such as arranging a driver to pick you up and take you to specific locations); or a general platform that provides a list of potential workers with job-specific talents.
Benefits of the gig economy
The advantages of a law firm utilizing the services of a gig worker are pretty obvious. A contracted job for special projects such as quick professional assistance, website creation, repair services, creative services, IT consultations, and so many other services can be contracted without the long-term commitment and costs of hiring additional employees. Gig workers also do not qualify for benefits, and an assortment of payroll taxes are not applicable. This is especially helpful when a law firm, or essentially any business, is in the early stages of development and/or expanding rapidly.
From the perspective of individual licensed legal professionals, there are many high-end freelance jobs available in the gig economy. On-demand legal service platforms, speaking engagements, freelance writing, creating CLE/educational materials, and renting out office space are only a few. There are also some possible opportunities for deducting expenses.
Deducting expenses such as the following:
- Business expenses, computer, internet, cell phone, licensing, CLE
- Home office deduction
The home office deduction was once considered by tax professionals as a lightning rod for IRS scrutiny; however, since there has been a “work at home” phenomenon from the COVID19 era, it has become more common place and is not considered so out of the ordinary. Adequate record keeping is always the best policy when it comes to contracting gig work or participating in the gig economy. Always maintain detailed records of income and expenses to support your tax return filings. When in doubt about deducting an expense, ask yourself if what you plan to deduct would be considered “ordinary and necessary” to complete your job as a gig worker.
Some of the pitfalls of working in the gig economy
- No guarantee of steady freelance work
- Exposure to tax nexus
- Record keeping
- Self-employment taxes
- Responsible for setting aside funds to pay quarterly estimated tax payments
- Gig anxiety from all added responsibilities
During the pandemic, the benefits of working in the gig economy became clearer than ever. Working from home, choosing your own hours, and choosing different jobs a la carte are a few of the perks of working in the gig economy.On the other hand, during an economic downturn, freelance jobs can be difficult to find resulting in more competitive pricing. Gig workers are also responsible for submitting their income taxes and self-employment taxes quarterly, using a Form 1040ES. Additionally, state tax nexus can be a significant issue. Similar to state labor laws, each state has its own unique laws governing income tax nexus. Accordingly, be sure to consider state income tax laws before performing gig work that involves any particular state. Many states have been changing their nexus standards to a broader method of determining taxation of business income based on the location of the revenue source. In other words, you may be subject to state taxation based on the income derived from your client in that particular state.
How does the Internal Revenue Service (IRS) view the gig economy?
Don’t let the popular term “gig worker” fool you into thinking there are no regulations and governing rules. The IRS plays a major role in classifying a gig worker (self-employed contractor) for the purposes of federal taxation. The IRS ‘s definition of gig work is therefore a good place to start. The following is an excerpt from the Internal Revenue Service’s definition of gig work: “Gig work is certain activity you do to earn income, often through an app or website (digital platform).”
The determination of whether an individual is providing services as an employee or as an independent contractor requires consideration of the degree of control and independence. The IRS applies “Common Law Rules” as somewhat of a litmus test for the degree of control and independence (an excerpt from the IRS common law rules can be found below).
Common law rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all of these factors when determining whether a worker is an employee or independent contractor.
Gig workers in the state of Nevada
Each state has their own criteria for determining who is an independent contractor (gig worker). You may notice that in most states the criteria are similar to that of the IRS. However, it is possible for a state to make a different determination than the IRS.
The Nevada Administrative Code refers to an independent contractor as follows:
“[…] ‘[i]ndependent contractor’ means a self-employed person who agrees with a client to do work for the client, for a certain fee, according to the means or methods of the self-employed person and not subject to the supervision or control of the client except as to the result of the work.”
(NAC 608.155 (4)).
The danger of misclassification
The IRS generally has the authority to propose reclassifying your payments to a gig worker as employee wages. In a similar fashion, if a gig worker does not meet the criteria as set forth at the state level, the gig worker may also be reclassified as an employee and subject to state employment taxes.
If there are significant conflicting deciding factors, the gig worker or law firm should consider filing a Form SS-8. Form SS-8 is a request for the IRS to issue a decision on a gig worker’s classification as employee verses subcontractor. In the event that gig workers are subsequently reclassified as employees, the employer will be retroactively subject to all of the taxes associated with employment. Filing Form SS-8 should not be taken lightly, as raising one’s hand to get the IRS’s attention is not necessarily the best alternative. Getting a timely answer can also be a challenge when trying to move forward. Waiting for a response to the SS-8 request can often take more than six months.
Be sure to keep good records regarding all gig workers that are contracted throughout the year. Law firms should always obtain a W-9 before making payments to gig workers. This will make issuing 1099s and other required documentation much easier at the end of the year and in the event of an audit. Contracting with foreign gig workers can be even more complicated and requires that the law firm obtain a W-8 to determine possible federal withholdings. Reporting requirements for foreign gig workers can be an especially complex area that will most likely require the advice of a tax professional.
Additional reference materials:
- IRS Publication 5369 (11-2019), entitled “Gig economy and your taxes: things to know” is general reference material for gig workers.
- The IRS provides additional resources at its website: IRS.gov/businesses/small-businesses-self-employed/manage-taxes-for-your-gig-work
- The Nevada Office of the Labor Commissioner provides on its website an Independent Contractor-Information Sheet: https://labor.nv.gov/uploadedFiles/labornvgov/content/Employer/Independent%20Contractor%20-%20Information%20Sheet.pdf
About the author
Mark D. Rich, CPA, CFF has been licensed for over 40 years and is Founding Partner of Rich Wightman & Company CPAS. Contact Mark at firstname.lastname@example.org.
About the article
This article was originally published in the Communiqué (Oct. 2023), the official publication of the Clark County Bar Association. See https://clarkcountybar.org/about/member-benefits/communique-2023/communique-october-2023/.
*This is CCBA’s Article #15: “Benefits and Pitfalls of the Gig Economy ” that offers 1.0 general Continuing Legal Education (CLE) credit to Nevada lawyers who complete the test and order form per the offer described in the October 2023 issue of Communiqué. See pp. 20–26 of the printed or PDF edition available to download (5 MB file): https://clarkcountybar.org/wp-content/uploads/2023/09/2023-10-Communique-web.pdf
. The CCBA is an Accredited Provider with the NV CLE Board.
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