There is no denying that the gig economy is growing. According to a report from the BCG Henderson Group, the use of gig economy platforms has grown more than 30% worldwide in recent years. Upwards of 40% of the companies surveyed in the report expect gig workers to become an increasingly larger portion of their workforce. Among other things, there are plenty of tax implications here.
Employers with long histories behind them know full well what is expected of them from federal and state taxing authorities. Many of them outsource their payroll to companies like Dallas-based BenefitMall in order to ensure payroll tax compliance. Unfortunately, individual gig workers new to contract employment often go into it without any understanding of the tax implications.
Do you run a company that employs contractors? If so, here are three ways BenefitMall says you can help your contractors be more tax proficient:
1. Remind Them of the 1099 Requirement
Gig workers and other contractors do not fill out W-4 forms. They also don’t get W-2 forms in January. Instead, they receive 1099 forms from any clients who pay them $600 or more during the previous year. Contractors use the information on those forms to complete their tax returns.
Your company can do contractors a big favor by reminding them about 1099s. When a contractor first comes on board, explain how the 1099s works. As the end of the calendar year approaches, a quick reminder can help. It encourages contractors to start looking for their 1099s in January. It would also be helpful to remind contractors that they are required to report all their income even if 1099s don’t arrive.
2. Educate Them About Self-Employment Tax
Another thing companies can do for their contractors is take the time to educate them about self-employment tax. In a traditional employer-employee situation, payroll taxes are submitted to cover FICA – the tax money that goes to fund Social Security and Medicare. Employers and employees split the FICA bill down the middle with each paying 50%. Money is withheld from a worker’s paycheck in order to cover his or her portion.
As contractors are not subject to payroll taxes, they must pay the entire burden of FICA on their own. They do so through a federal self-employment tax. Contractors need to know this ahead of time so they can put money away during the course of the year. Otherwise they may find themselves facing a hefty tax bill they can’t pay.
3. Remind Them of Quarterly Tax Payments
Finally, contractors who earn above a certain threshold don’t have the luxury of waiting until April to pay the tax due from the previous year. Instead, they are required to make estimated tax payments quarterly. Companies can help their contractors by reminding them of these payments.
Quarterly tax payments are due on April 15, June 15, September 15, and January 15. The amount due is based on one of the following: an estimate of how much the contractor will make during the current calendar year or the total amount of tax paid for the previous year. Contractors get to choose which model to follow.
With the gig economy moving ahead at full steam, more and more people are embracing the concept of contract work. Indeed, the previously mentioned survey showed that 20% of America’s contractors would never consider going back to traditional employment. Hopefully they understand the tax implications of their choice. As an employer, you can help your contractors be more tax proficient by helping them stay abreast of their obligations.
Danny White is a freelance writer who offers to ghostwrite, copywriting, and blogging services. He works closely with B2C and B2B businesses providing digital marketing content that gains social media attention and increases their search engine visibility.