My research into the Gig Economy phenomenon has resulted in several confusions of terminologies. To some degree that should be expected because it is still in something of a “growth phase” resulting in many personal interpretations. Alternate terminologies such as the On Demand Economy and the 1099 Economy appear to assist in coming to at least a general understanding of what it is because their words at least are better indicators than the generic word “gig” which can be applied to just about anything short term or impermanent. Yet even those have their interpretations the more you look into it.
For example, the 1099 Economy is based on the 1099 tax denomination and does help to understand what’s going on because Independent Contractors use this when doing their yearly taxes. The generic concept is that it differentiates between the Independent Contractor who is responsible for all of their taxes and must file tax estimates quarterly in contrast to the W2 worker which is the traditional “Nine to Fivers” whose employers take care of the majority of the taxes prior to distributing paychecks and are required to file yearly. The thing is that 1099 isn’t as simple as it sounds once you look into it because your yearly taxes can include both a W2 and a 1099. So just exactly what is 1099?
An article by Bill Fay on Debt.org (published date not given) states, “1099 forms are federal income tax information forms from businesses and other institutions to document certain financial transactions conducted during a tax year”. “Tax information forms” is the most often used definition when researching these. Yet here’s how W2 and 1099 can be on the same tax submission; “Specifically, the 1099 series reports all earnings and proceeds other than wages, salaries and tips, which are reported on the federal W-2 form. There are more than 20 different versions and variants of the 1099 form, but the most common is the 1099-MISC”.
For example, many years ago I taught guitar, keyboards, and Music Theory at a local music store along with a full time job. The owner just wrote a check each week for the services rendered so I had to use a 1099-MISC to report that income in conjunction with the W2 from my full time job. In order to get the biggest bang for those bucks I used a Tax Accountant who knew the Ins and Outs of write-offs. I never filed quarterly and just took the penalty because the yearly total wasn’t significant enough and the penalty was “buried” in my refund being slightly lower.
I have also received other 1099’s that I had to claim on my taxes such as my checking account gives me interest based on my balance once I meet their requirements. They issue a 1099-INT for Interest Income. If you sign up for something that gives you money in return you will receive a 1099, most likely the MISC but I’m not versed in tax rules. I base this on the fact that the 1099-MISC is issued for non-employee compensation greater than $600 yet is issued for any other “miscellaneous” income greater than $10. That $100 deposit your bank gave you for opening up a new account or the $50 Gift Card you received for a new cable or satellite service will all require a 1099 because if you don’t pay the tax, they have to so you can bet they won’t forget. For those who have stocks and are issued any dividends they will receive a 1099-DIV. If you’ve collected Unemployment you will receive a 1099-G. Yet you can have some tax withheld with unemployment if you choose but the government isn’t your employer so one is issued. The list goes on and on and can get confusing if you receive some or all of your income from a variety of sources.
For more information on the various types of 1099, check out this Wikipedia link: https://en.wikipedia.org/wiki/Form_1099
Therefore the 1099 Economy is in essence the 1099-MISC Economy because the focus is on Independent Contractors but that doesn’t sound as glamorous. When looking into what legally designates when a company should issue W2 in contrast to 1099-MISC, you can begin to sense some of the problems that are arising in the Gig Economy such as recent law suits with Uber where compensation has been given to some drivers that have proven Uber’s actions are more like an employer.
The article titled “W2 or 1099? Employee or Contractor? What’s the Difference?” by Christa Aiani posted on the Loganville Patch in January 2016 gives some good definitions of these. As an Independent Contractor “you have the right to direct and control the most important aspects of your activity…your income earned will be reported to you by the payer on a Form 1099-MISC…However, you must report all the income you earned during the year, even if your client does not issue a Form 1099-MISC for your services…As an independent contractor you are self-employed and…generally have to pay self-employment tax (Social Security and Medicare tax) as well as income tax”
You receive a W2 “if your payer has the right to direct and control your activity. The factors of control fall into three key categories: Behavioral control, Financial control, and The relationship between you and your payer”. The IRS has a 2 page PDF called “Independent Contractor or Employee” that highlights these differences but still has some cloudy areas. There is this recourse whenever this is as clear as mud, “If your worker status is unclear you or your payer can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS to help determine your status”.
The Uber problems have arisen over the amount of control they exert on their drivers which challenges their Independent Contractor designation. Whether your involvement with the Gig Economy is more related to the app based On Demand income or you are freelancer using your specialized skills to create your income, the bottom line is that the income you receive will be the Gross amount and from there taxes will have to be paid. If you don’t pay an estimated tax quarterly then you will pay more due to the penalty so make sure you fully understand all aspects of this. This is particularly true for many of the app based On Demand gigging because so much of that touts average hourly earnings around $15/hr but that’s before expenses such as vehicle depreciation, monthly payments, maintenance, fuel, etc.
Giggers and Freelancers Beware! I read several accounts of how the IRS is well aware of the growing Gig Economy in contrast to misreporting your 1099-MISC income. This can result in an IRS Audit which is not something you would like to go through. I’ve never been through one but the “buzz on the streets” has always been that it’s very intense and involved. Therefore it’s best to know what you need to do in order to avoid having to deal with this.
To assist you getting your head wrapped around this, click on this link to the IRS FAQ called “Top Frequently Asked Questions for Small Business, Self-Employed, Other Business” for starters but most importantly if you’ve not already done so, schedule a consultation with your local tax person because as an Independent Contractor the write-offs are a Key Player in helping you keep as much of that income as possible.
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