The gig economy is transforming the way work is performed. On-demand drivers, dog walkers, and freelance writers are only a few examples. There has also been the emergence of various gig platforms like Fiverr, Upwork, and Guru which enable the organization or individuals to recruit freelancers. Though gig work offers flexibility and autonomy for workers, they don’t have the traditional benefits (e.g., health insurance and a 401k) that employees have. This page discusses the gig economy, gig workers, and the laws that protect them.
In a gig economy, temporary, flexible jobs are commonplace and companies tend to hire independent contractors and freelancers instead of full-time employees. It is a non-standard form of work where the freelancers or independent contractors doesn’t have usual hours of work, fixed holidays, and fixed salary. According to the Cambridge dictionary, gig economy refers to a form of work that is based on people having temporary jobs or doing separate pieces of work, each paid separately rather than working for an employer.
A gig worker is someone who earns their income outside of the employee-employer relationship. The work can be project-based, hourly, or part-time. There are several types of gig workers: independent contractors, online platform workers (e.g., Uber and Lyft), contract firm workers, temp workers, and on-call workers. Gig workers, as they are classified for tax purposes, receive 1099 forms when they work for companies without being a direct employee. Payroll taxes are not deducted in the 1099 form, and many of the traditional rules, regulations, and benefits like healthcare that apply to direct employment relationships do not apply.
Pros
Gig workers choose their jobs, and they have the freedom to work on assignments that interest them. They also have the flexibility to plan their schedule based on their needs.
Cons
Gig workers classified as independent contractors are responsible for their own taxes. They must pay the government payroll taxes because an employer does not do this for them on a W-2. Gig workers must make quarterly payments to the IRS and put away enough income to cover these payments. Clients can terminate gig workers without warning. Gig workers also must fund and manage traditional employer-based benefits like a retirement plan and health insurance.
The major issue with the gig economy is the lack of workplace protection. Without formal employment there are no minimum guaranteed hours, sick pay benefits, maternity rights, or holiday pay. There is also little to no protection or compensation if a job falls through at the last minute. Because of this, it has long been seen as a pool of cheap labor for those who wish to reap the benefits of having staff without the legal commitments of an employment relationship. The core question related to this is how gig workers is classified. Companies treat gig workers as independent contractors — avoiding standard features of employment like minimum wages, taxes, and other costs — but many argue workers fit the current legal definition of employees. Also, many app-based gig workers (e.g., Uber) bear all the risks of being in business for themselves and reap none of the rewards. Unlike a true “independent contractor” they do not have the autonomy to build a base of customers, set their own rates, make their own decisions about the services they offer, or otherwise manage their own business.
Here are some things gig workers should know to stay on top of their tax responsibilities.
Gig work is taxable. Earnings from gig economy work is taxable, regardless of whether an individual receives information returns. Gig workers may be required to make quarterly estimated tax payments. If they are self-employed, gig workers must pay all their Social Security and Medicare taxes on their income from the gig activity.
While providing gig economy services, it is important that the taxpayer is correctly classified. This means the business, or the platform, must determine whether the individual providing the services is an employee or independent contractor. Taxpayers can use the worker classification page on IRS.gov to see how they should be classified. Independent contractors may be able to deduct business expenses, depending on tax limits and rules. It is important for taxpayers to keep records of their business expenses.
Gig workers must pay the right amount of taxes throughout the year. An employer typically withholds income taxes from their employees’ pay to help cover income taxes their employees owe. Gig economy workers who aren’t considered employees have two ways to cover their income taxes:
- Submit a new Form W-4 to their employer to have more income taxes withheld from their paycheck if they have another job as an employee.
- Make quarterly estimated tax payments to help pay their income taxes throughout the year, including self-employment tax.
The Gig Economy Tax Center on IRS.gov answers questions and helps gig economy taxpayers understand their tax responsibilities.
Hispanic adults are more likely than other racial or ethnic groups to have done gig work: 30% of this group have ever earned money through an online gig platform, compared with 20% of Black adults, 19% of Asian adults and even smaller shares of White adults (12%). Overall and within age groups, Hispanic and Black Americans are more likely than White Americans to have ever earned money doing any online gig platform work. See the Pew Research Center for more information.
The Federal Trade Commission (FTC) has enforcement priorities to fight on behalf of gig workers against deception about pay and hours, unfair contract terms, and anti-competitive wage fixing between gig economy companies. The FTC will aim to prevent harm to gig workers in several areas, including by:
- Holding companies accountable for claims and conduct about costs and benefits. Gig companies must not be deceptive in their claims to prospective gig workers about potential earnings, and they must be honest about costs borne by workers.
- Combating unlawful practices and constraints imposed on workers. Gig companies using artificial intelligence or other advanced technologies to govern workers’ pay, performance and work assignments must keep promises they make to workers. Companies must also ensure that any restrictive contract terms, including those limiting workers from seeking other jobs, do not violate the FTC Act or other laws.
- Policing unfair methods of competition that harm gig workers. The FTC will investigate evidence of agreements between gig companies to illegally fix wages, benefits or fees for gig workers that should be open to competition. The FTC also will investigate exclusionary or predatory conduct that could cause harm to workers, reduced compensation or poor working conditions for gig workers.
See the policy statement for more information.
The ABC test is a three-prong test for establishing employee status. It presumes a worker is an employee unless: (A) the worker is free from the employer’s direction and control, (B) the work is outside of the “usual course” of the employer’s business, and (C) the worker is engaged in an independent trade, occupation, or business. Some states have passed specialized laws that employ the test in certain sectors. See the National Employment Law Project website for a US map shows where the test is used.
California. California Assembly Bill 5 (AB5) presumes all workers to be employees unless they can satisfy all three prongs of the “ABC test” for independent contractor status. The ABC test, which mandates a worker be classified as an employee, not an independent contractor, unless all the following are met:
- the individual is free from the employer’s control in performing the work;
- services are performed outside of the employer’s normal business; and
- the worker is customarily engaged in an independently established business of the same nature as the performed service.
The law carved out more than three dozen industry exemptions covering a variety of professional services providers (such as online freelancers like graphic designers and writers), highly paid professionals (such as physicians and attorneys), and certain beauty and personal care professionals (such as barbers). In addition, California voters adopted Proposition 22, a ballot initiative that specifically exempted ridesharing and delivery drivers from most of the protections in the law. See the law for more information.
Florida. Senate Bill 542 gives businesses the ability to support independent contractors during a state of emergency (e.g., a pandemic or a hurricane) without impacting their worker classification. The law covers an engaged individual, who is someone “who provides a good or service to a business or on behalf of a business and who is remunerated for the good or service, regardless of the individual’s classification as an employee or independent contractor.” Under the bill, anyone compensated by a business would fall into that “engaged individual category.” See the law for more information.
Georgia. House Bill 389 clarifies that drivers for app-based transportation and delivery networks aren’t classified as employees, if the app company meets certain criteria such as allowing the drivers freedom in what hours they work and which ride or delivery requests to accept. The companies also cannot ban their drivers from driving for other companies or holding other jobs. See the law for more information.
New York City. New York City passed a suite of laws to protect third-party food delivery app workers. These laws are summarized below.
- License Requirement. Third-party food delivery services are required to obtain a license in order to do business in New York City. See the law for more information.
- Payment Standards. Food delivery apps and couriers are prohibited from charging delivery workers for the payment of their wages. The law also requires that food delivery apps and couriers pay their delivery workers for their work at least once per week. See the law for more information.
- Minimum Per Trip Payments. The Department of Consumer and Worker Protection is required to study the working conditions of third-party food delivery workers, including income, expenses, required equipment, hours worked and safety. Following the study, the Department would be required to promulgate rules establishing the minimum per trip payments that must be made to third party food delivery service workers by January 1, 2023. See the law for more information.
- Bathroom Facility Access. Food delivery apps must include a provision in contracts with restaurants requiring them to make their toilet facilities available for delivery workers’ use, as long as the delivery worker seeks to access the facilities while picking up a food or beverage order for delivery. See the law for more information.
- Disclosure of Gratuity Policies. For each order placed on a food delivery platform, the bill prohibits a food delivery application from soliciting a tip from a customer unless it discloses the amount or proportion of each gratuity provided to the delivery worker; and the way gratuities are provided, whether immediately or not, and whether in cash or not. See the law for more information.
Washington. House Bill 2076 provides for minimum per-trip payments, paid sick leave, and workers’ compensation benefits for rideshare drivers. The law also ensures that these workers will maintain their status as independent contractors and that transportation network companies will be free from the imposition of additional requirements on their businesses by local governments. The law has several areas with future effective dates.
- Beginning Dec. 31, 2022, transportation network companies are required to ensure a driver’s total compensation is “not less than” $0.34 per passenger platform minute and $1.17 per passenger platform mile or $3.00 per dispatched trip, whichever is greater. Drivers with rides in cities with populations of more than 600,000, such as Seattle, will earn at least $0.59 per passenger platform minute and $1.38 per passenger platform mile or $5.17 per trip, whichever is greater.
- Beginning Jan. 1, 2023, the Washington State Department of Labor and Industries will assess premiums for workers’ compensation coverage for rideshare drivers.
- Beginning Jan. 1, 2023, drivers will accrue one hour of paid sick leave for every forty hours worked, subject to the terms set forth in Washington’s paid sick leave.
The law maintains the independent contractor status of drivers in the state See the law for more information.
Washington, Seattle. The Seattle City Council passed legislation that provides a pay floor and increased flexibility for gig workers who deliver meals, groceries and packages, and some on-demand service providers. The law sets a minimum wage that accounts for expenses incurred by workers, states that tips come on top of the wage, creates transparency for app-based companies that requires them to share information up-front regarding pay, tips, and details of each job, and prevents companies from penalizing workers based on the shifts and jobs that they accept. Taking effect in December 2023, the ordinance covers “network companies” with 250 or more app-based workers worldwide and applies to on-demand app-based delivery drivers. See the law for more information.
The law does not apply to marketplace workers, who preschedule and negotiate rates for their orders, or to transportation network rideshare drivers, who are already covered under a separate chapter of the Seattle Municipal Code which establishes minimum payments for minutes, miles and trips. See the law for more information. Marketplace workers are also covered under the Washington state law outlined above.
Hispanic adults are more likely than other racial or ethnic groups to have done gig work: 30% of this group have ever earned money through an online gig platform, compared with 20% of Black adults, 19% of Asian adults and even smaller shares of White adults (12%). Overall and within age groups, Hispanic and Black Americans are more likely than White Americans to have ever earned money doing any online gig platform work. See the Pew Research Center for more information.