Are the days of the conventional office dweller numbered? According to a recent NPR/Marist poll, maybe so. Researchers found that one in five jobs in the US today is held by a worker under contract rather than salaried employee. While many of these contract gigs supplement a worker’s primary income, further research by the McKinsey Global Institute shows that 44 percent of independent contractors have jettisoned the 9-to-5 and make freelancing their main financial source.
If the current pace continues, independent contractors and freelancers could make up half of the American workforce within just a decade. While the trend means perks for both employers and workers, it also carries legal and tax-related risks. That’s why the savviest of payroll service bureaus make sure their systems and clients are primed for the growing gig economy. Here are three things payroll providers and their clients must know:
- The perks: Freelancers enjoy more autonomy, flexible scheduling and a justification for charging project rates significantly higher than their salaried hourly rates Despite the higher rates, businesses gain a financial break by not offering freelancers pricey, long-term benefits. Freelancers often bring a higher degree of specialization, which can prove beneficial on short-term projects. Plus, hiring independent contractors allows businesses to “audition” a worker before offering him or her a permanent position.
- The paperwork: Hiring an independent contractor requires completion of a 1099-MISC form. From there, IRS reporting requirements depend upon the full amount of money paid to a contractor in a tax year. If less than $600 is paid, there’s no need to report payments. Anything over $600, however, requires employers to document and report all payments to both the independent contractor and the IRS. Deadlines apply, too – Typically January 31 to send 1099 reporting information to contractors; and March 2 for paper report filing or March 31 for electronic filing to the IRS. States may also require reporting by certain deadlines. Your payroll software should help you remain complaint with these reporting requirements.
- Misclassification can be pricey: The IRS and the US Department of Labor, under the Fair Labor Standards Act, outline multiple differences between common-law employees and independent contractors. But sometimes, the line can be blurred, particularly if a contractor works out of a client’s office or has been providing services for an extended amount of time. And misclassification can prove a pricey mistake. FedEx learned that lesson in 2016 when it agreed to pay $240 million to drivers the company had misclassified as independent contractors, allegedly to avoid the litany of federal and state tax withholding, fringe benefit, anti-discrimination, health care, pension, worker’s compensation and unemployment insurance obligations that hiring of conventional employees triggers. Despite an employer’s stance or original intent, a variety of state and federal agencies, including the IRS and the courts, can examine and reach their own determination on a worker’s status when a dispute arises.
Understanding the various nuances and requirements of hiring independent contractors can be tricky. Apex HCM offers a full suite of payroll and HR software solutions to assure your clients remain fully in compliance and enjoy all the benefits of the growing gig-based workforce.
If your firm offers payroll or human resources services, be sure to attend the upcoming APEX Users Conference, Align 2018, September 20-21 in Atlanta. Call 877-750-2739 for information or register online, here.