It’s now easier than ever to make money on your own. Whether it’s a side venture that earns you a few bucks now and then or a full-time business, there are a variety of ways to create your own income.
You could rent out a room of your home on Airbnb, become an Uber or Lyft driver, design logos for clients or offer your services as a writer for various blog content – just to name a few.
Over the last several years, this “do-it-myself” mentality has carved out a whole new segment of workers who operate in a space called the “gig economy”. That’s the informal name for the growing labor market of temporary positions with independent workers.
In many cases, it’s easy to tell if you’re part of this group. But, in other instances, understanding if you’re an independent contractor or an employee isn’t as clear. And you can’t always count on the person or organization that pays you to correctly define your role.
Fortunately, the Internal Revenue Service (IRS) has set forth guidelines to help determine the specific group you fall into. When thinking about your current employment status, consider these factors when trying to decide if you’re a member of the gig economy.
Control.
If someone controls what you do and how you do it, you may be an employee. However, if someone is only concerned with what you produce or accomplish, you are more likely to be a contractor.
For example, if you work in an office or factory under all day supervision, you are generally an employee. But, if you work from home and simply send your work to the person who pays you, there’s a good chance you’re an independent contractor.
Financial aspects.
If the person who pays you covers all your expenses, from paper clips to vehicle costs, you’re more likely to be an employee.
On the flip side, if you pay for your own tools and supplies, you’re typically an independent contractor. Likewise, if you are paid according to how much product you produce or your sell, you are generally an independent contractor.
Relationship.
Ask yourself this: does the person who pays you treat you like an employee? If you get sick pay or vacation time, health insurance and a pension plan from your employer, you’re probably an employee.
If you only work for one person or business on an ongoing basis, the scale also tips toward an employer/employee relationship. On the other hand, if you perform work for various people at once, you may be an independent contractor.
Why it’s important to understand the gig economy.
You do not have to meet all of these requirements to be part of the gig economy as an independent contractor. According to the IRS, no one factor alone determines how your work should be classified. You and the person or business you work for should weigh the factors and make the best decision for your situation.
However, it’s important that distinction is made clear for tax purposes. If your work classifies you as member of the gig economy, you may need to start setting aside part of your income for taxes. You’ll also need to start paying quarterly estimated tax payments. The last thing you want is to file your tax return and realize you owe a big tax bill because your “employer” considered you an independent contractor and didn’t withhold taxes on your behalf.
It’s best to understand your situation upfront, so you are completely prepared come tax time.
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