Businesses that need contingent workers outside of their company to complete specific tasks or short-term projects generally turn to independent contractors to cover the gap. With the rise of the gig economy, independent contractors are now often referred to as gig workers. This begs the question: Is there actually a difference between a gig worker and an independent contractor, and what does it mean for your organization?
TL;DR: The IRS classifies gig workers the same as independent contractors, but in practice freelancers who use online platforms to find gig work tend to have less complex business structures and less control over the contractual terms of their work. Also, state laws vary.
Where does the term “gig worker” come from?
Jazz musicians coined the term “gig” to refer to their paid performances, which were one-off temporary jobs—similar to some of the gig jobs available today.
The term “gig economy,” though, caught on during the influx of “flex work” popularized by online platforms like Uber, DoorDash, and TaskRabbit, which connect freelancers to the platform’s customers.
The COVID-19 pandemic and the recession that followed drove even more people to take on short-term jobs. In fact, an Upwork survey found that 39% of the American workforce (or about 60 million people) freelanced in 2022.
But while the terms “gig workers” and “gig economy” have been popularized fairly recently, the gig workforce and the gig economy itself aren’t new; there has always been a market for short-term services.
What gig economy workers and independent contractors have in common
Gig workers and independent contractors are often paid on an hourly or project-based basis. At the federal level, the IRS does not distinguish between the two—meaning that they receive 1099-NEC forms from the companies they work with when they earn $600 or more.
Another commonality—and one of the biggest reasons so many people are drawn to self-employment in the first place—is the freedom and flexibility it offers. Contractors are free to complete their work in whatever way they see fit, as long as it meets the terms of their contract.
They’re also more likely to set certain terms, including their work location (many work remotely), and they determine their own schedule. Traditional employees, on the other hand, may be required to adhere to schedules per their employer’s requirements, and typically have much less control over how something is to be completed.
But despite having many freedoms not available to most employees, gig workers carry many different responsibilities than their traditionally-employed counterparts. In addition to bearing the full responsibility for self-employment taxes and benefits (like, healthcare, time off, and disability insurance), they’re responsible for maintaining their own equipment to get the job done.
Another point of concern? How much they’re liable for, both personally and professionally.
When they’re on the clock, employees generally don’t need to worry about much besides their direct responsibilities and duties. All of the overhead and administrative burden is covered by their employer. Independent contractors, on the other hand, take on the role of employer and employee. So in addition to staying on top of their billable work, they are responsible for everything else that keeps their business of one running. This includes getting their own health insurance, along with other important details like professional liability insurance, which covers their legal expenses if a client sues them. And unless they set their business up as a limited liability company (LLC) or a corporation, they are also personally liable for any debts or financial obligations their company incurs with contract work.
This means that contractors are often easier to hire for than employees (depending on their rates and availability), because they may not be as big of an investment (or risk) to a company.
What’s the difference between a gig worker and an independent contractor?
Again, the IRS does not distinguish between the terms “independent contractor” and “gig worker,” but because of the connotations attached to each, they’re often used in different scenarios.
Both words refer to workers who are hired for a short period of time or to complete a specific task. “Independent contractor” is the formal term that the Internal Revenue Service (IRS) uses to label these workers for income and tax purposes, although you might also hear “freelancer” and “self-employment” attached to this style of work too.
But as you’ll see, there’s more to the story than that.
Independent contractors are often professionals who tend to work with other businesses, bringing a specific trade or professional skill set and proven experience to the projects they take on.
They’re also more likely to:
- Market their skills via a business website and/or ads
- Have a set pay rate or range
- Have a more complex business structure (think LLC or corporation versus sole proprietorships)
- Have a contract with their own terms that their clients sign
On the other hand, you’ll hear the word “gig worker” used more often nowadays to refer to people who find work on platforms like Lyft, Fiverr, and Instacart. Gig workers are more likely to work directly with the platform’s customers and take on multiple gigs to make up a year’s worth of income.
Individuals who find work on third-party platforms are typically required to accept gigs on the company’s terms as well. In short, gig workers have less negotiation power than independent contractors in many ways. An independent contractor may set their rate for a job and negotiate with the employer. However, customer platforms may have greater control over working conditions and pay rates, meaning the workers themselves have far less agency in this type of work relationship. Think of how rideshare companies like Uber and Lyft set strict pay rates for their drivers, how Fiverr and Upwork restrict freelancers from contacting clients outside of the app, and how many platforms like these take a percentage of what gig workers make as their cut. In these instances, a downside is if the gig worker doesn’t accept the terms of the contract, they can’t negotiate and still earn money on the platform. If the terms are not accepted, a worker cannot take the gig.
At the state level, legislation is evolving and in some cases the differences between gig workers and independent contractors are recognized. California’s Assembly Bill 5 (AB5), for example, distinguishes between gig workers and traditional independent contractors who run their own businesses, such as accountants, doctors, hair stylists, and real estate agents. Specifically, AB5 serves to reclassify gig workers as employees in certain circumstances.
How are independent contractors different from employees?
The biggest difference between independent contractors and employees lies in the relationship they have with the company they do work for. Full-time employees usually have longer-term relationships with one employer, get paid an hourly wage or salary, and receive W-2 forms come tax time. Employers are responsible for the following:
- What work their employees do and how
- Where the employee works
- Withholding taxes and paying Social Security, Medicare, and unemployment taxes on their employees’ behalf
- Following minimum wage and anti-discriminatory hiring standards as well as other labor practices
It’s very important to classify workers correctly for tax and legal purposes. Misclassifying employees as independent contractors or vice versa could lead to complications for your company and the workers in question, and even lawsuits if it harms their income or ability to work.
The IRS offers three criteria to help business owners determine whether a worker should be classified as an employee or independent contractor:
- Behavioral control: Whether or not the company is able to dictate how the work is performed by the worker—e.g. through the use of company training, evaluations, and tools
- Financial control: Whether or not the company is able to control the financial aspects of the worker’s job, including how workers are paid (salary/hourly, and frequency of payment) as well if/how they are reimbursed for work-related expenses
- Relationship: The permanency of the relationship, any benefits provided (like healthcare, PTO, and retirement), and whether or not the work is essential to the business are all factors
Read our in-depth guide to learn more about classifying contractors and employees.
Things to know if you’re considering a business model dependent on gig workers
Independent contractor laws and legal issues
Independent contractor work is a hot topic for lawmakers right now, and there’s always a chance that new legislation may affect your organization’s operations or business model. If your state’s Department of Labor provides alerts about changes to local laws, that’s one good way to stay informed.
Because of the many challenges that come with freelancing, some states have moved to protect their rights as workers. In 2017, New York passed the Freelance Isn’t Free Act to ensure that freelance workers received written contracts for work performed, full and timely payment for their services, and legal protection for exercising their rights under the new law.
Other states have passed laws to ensure businesses pay their fair share of taxes and benefits for eligible workers. California’s AB5 in particular addressed the issue of gig workers at companies like Uber and DoorDash who regularly work 40 hours a week but receive no employment benefits; the law implemented a new test for these companies to prove their workers are, in fact, independent contractors rather than employees.
The modern workforce and the laws regulating it are rapidly evolving, which makes it crucial to know how to properly classify your workforce if you plan to bring freelancers onto your team.
If you already work with independent contractors, you’ll want to stay up to date on any legal changes taking place in your state (and other states too, if you have gig workers located there) to ensure that you’re in line with the latest regulations.
If an incorrect classification takes place or if your current practices don’t align with newly ratified laws, a labor and employment lawyer can help you resolve potential employment violations and tax offenses.
The influence of large-scale gig work on company culture
Relying on freelancers for much of your company’s operations can leave a lasting impact on company culture.
Think about the potentially transitory nature of freelance work: Independent contractors typically take on project-based work that may or may not last for long periods of time. Because they are autonomous, they have the ability to easily move on to the next job.
If you have freelancers constantly shuffling in and out of projects, it can also be exhausting for your employees to onboard new, temporary team members and manage the vendor relationship, which often includes following up on invoices, renewing contracts, and negotiating (and renegotiating) rates—among other administrative necessities. You might even see a drop in your team’s productivity and morale.
For the best results, it’s ideal to have a company culture that makes team members (employees and contractors) feel welcome from day one. When independent contractors understand the company’s unique values and way of working, they will be more effective at working alongside your full-time team members.
The gig economy’s impact on freelancer burnout and financial instability
The widespread adoption of gig work has been a boon for many companies that rely on short term help and services. But some see hiring gig workers as an opportunity to save money on things like benefits, paid sick leave, payroll taxes, unemployment taxes, minimum wage, and OSHA safety regulations. And while it may help their bottom line look great in the short-term, it’s important to consider the long-term effects of this decision.
Since independent contractors don’t have the same rights afforded to full-time employees (which typically includes benefits) and they have to pay self-employment taxes, they may feel the need to work day after day without breaks—even at the cost of their own health and other responsibilities.
This is exacerbated further by unstable supply and demand of freelance work—and an ever-fluctuating market rate. As you might imagine, contract workers who lack both a safety net and a living wage are under a lot of stress. And, as a 2022 Leapers report found, 41% of freelancers said that stress, anxiety, and poor mental health undermined their ability to work. This, in turn, can affect the companies that they work with.
The role the gig economy may play in increasing racial inequality
Data indicates that high-paying gig work is more common among white professionals who are already well-off to begin with, and many of them use freelance work as a way to supplement or replace an already-sizable income.
On the other hand, lower-wage work is disproportionately held by people of color, those who don’t fit into the traditional labor market (like college students and part-time workers), and other individuals who may be at a disadvantage in the job market. Gig work is often either their only source of income or one of several jobs, and they’ll often accept lower rates because they lack better alternatives.
Some argue that the gig economy exploits the precarious financial situation that many minority groups find themselves in, as they’re more likely to experience financial insecurity and less likely to have opportunities for career progression.
And with minority groups already impacted by issues like racial inequality in the workplace and a lack of access to financial services, low wage gig work without benefits may play a role in widening the gap.
The bottom line for employers
Small business owners who are interested in using gig work to scale their operations on-demand have the opportunity to be thoughtful about their approach. Some questions to consider include:
- When is gig work an appropriate (and fair) alternative to hiring full-time or part-time employees?
- How can I structure the working relationship to offset the challenges and liabilities freelancers take on to support my company’s growth?
For example, popular self-employment perks like flexible schedules could actually be incorporated into employee benefits packages. Now that the coronavirus pandemic has shown that it’s possible for entire workforces to operate remotely and on different schedules, benefits like these aren’t exclusive to freelance work anymore.
