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Gig economy growth has serious business tax implications

It’s hard to know how large the so-called gig economy is and how fast it is growing. The federal Bureau of Labor Statistics says current data sheds some light on the subject, but the agency admits it’s unreliable because it’s so old. One report by the Brookings Institution’s Metropolitan Policy Program, credited by some as the most trustworthy, says the number of workers in the gig economy has grown by about 27 percent in the past 20 years. But who really knows?

One reason it’s so hard to nail down the numbers in this obviously important part of the economy is that there’s so much confusion about who makes up the population. And that confusion can easily translate into income and payroll tax troubles for individuals and businesses in Minnesota and Wisconsin.

Misclassifications have consequences

If you don’t correctly classify a person as either an employee or a contractor, or if you fail to take the steps as a contractor to pay your estimated taxes quarterly, you could find yourself in significant trouble with the IRS. As noted, however, there’s confusion over definitions. And differing legal decisions from various jurisdictions, such as whether ride-share drivers are employees or contractors, don’t help.

The IRS does make an effort to make the rules clear on worker classification. For business owners, it comes down to the answers to two fundamental questions.

  • Who’s in control of work behavior? If you direct what a worker does, when it gets done, and how, you exert behavioral control; and the person directed is an employee.
  • Who exercises what over finances? If the worker provides his or her own equipment and invoices you later for expenses he or she has incurred and paid, the right classification would be contractor.

There can be many other indicators whether a worker should be classified an employee or contractor. By knowing the rules and applying them, confrontations with the IRS aren’t likely. If you do receive a notice of some tax shortcoming, consult an attorney to learn your options on how best to respond.

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