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Tax Software for CPA Firms Supporting the Gig Economy

Jobs that were considered mere “side hustles” in the 90s are now seen as viable ways for individuals to make a living. As more individuals embrace freelance, temporary, and contracted work, the impact that these workers have on the American workforce cannot be overlooked.

Business reliance on the gig economy was at its peak just prior to the pandemic. At the time, trends suggested that the American workforce would soon be dominated by nontraditional workers, with some estimates suggesting that more than 50% of workers would be freelancing by 2027. But when COVID-19 made its appearance, gig workers lost their jobs alongside their employed counterparts. Although we cannot predict exactly how businesses will rebuild their workforces, we know that individuals are considering contracted work now more than ever. In a world that’s so uncertain, individuals want to exercise more control over their professional lives and rely less on employers to meet their needs.Individuals who choose to work in the gig economy will see their taxes change, and so will the businesses who hire them. If you have clients in the gig economy, make sure you have tax software for CPA firms that meets their needs.

What is the Gig Economy?

The gig economy is a term used to describe a workforce comprised of independent workers – freelancers, temporary workers, contracted workers, and other workers operating independent of an employment agreement. While employees are obliged to follow company guidelines on how and when to complete their tasks, gig workers can control the nature of their work. To do this, most gig workers establish relationships with one or more businesses by agreeing to specific arrangements – single projects, strings of projects, or jobs that are of limited scope. This allows them to choose jobs that best fit their skillset and interests.

But this freedom does come at a cost. Gig workers are not provided the same workplace protections as employees, such as:

  • Health insurance benefits
  • Retirement options
  • Training
  • Paid time off
  • Overtime pay
  • Equipment
  • Legal protection

When thinking of the “gig economy,” most people envision rideshare drivers, Airbnb hosts, and pet sitters, but so many other jobs fall into this category, including:

  • Freelance graphic designers, writers, photographers, and artists
  • Consultants in fields such as accounting, law, medicine, human resources, and public relations
  • Highly skilled contractors like programmers, plumbers, and IT analysts
  • Trained professionals hired on a per-job or per-client basis like therapists, stylists, and doulas

Gig economy workers are – by definition – self-employed. They select the companies they work for and the work that they do, and they get to decide when it’s time to move onto other projects. As self-employed persons, they have unique tax considerations compared to employed individuals.

Tax Considerations for Gig Workers

If your client is a gig economy worker, they will owe taxes on the income they earn. It doesn’t matter how temporary their work is, and it doesn’t matter if their job is a side hustle or their full-time position; if they make money, they will owe taxes. There is a common misconception that individuals need not report their self-employment income if it’s below a certain threshold. While the IRS does have minimum gross income thresholds, most of your clients will not qualify for this exception.

In 2020, single taxpayers are not required to file tax returns if their earned income from all jobs – employed and self-employed – is $12,400 or less (this threshold is doubled for married taxpayers). If your single client makes $3,500 as a gig worker and $35,000 from their employed position, they must report and pay taxes on both categories of income. The threshold is not determined on a per-job basis. However, the self-employment tax kicks in at a much lower rate.  Just over $400 in self-employment income will result in self-employment tax and will require a tax return to be filed, even if below other filing limits.

Some gig workers will report their income on Line 8 of Form 1040, Other Income, but those with business expenses must report their income on Schedule C, Profit or Loss from Business. Schedule Cs follow many of the same reporting guidelines as other business entities, but some deductions will be limited. If your client purchases an asset that they use for both business and personal use, they will not be eligible for the full deduction. This calculation can be tricky, but if you have tax planning software for CPA firms that’s built to help you support self-employed workers, you will have no trouble determining the optimal deduction.

Your gig economy clients will also need to make quarterly estimated tax payments. Again, with a good tax planning software, you can help them figure out how much to pay in each quarter. Our Corvee tax software for CPA firms helps you project your client’s income for the year ahead so that you can determine how much they should pay in each quarter.

And lastly, self-employed workers are subject to self-employment taxes. This 15.3% tax rate is in addition to income tax and consists of two parts: 12.4% for Social Security and 2.9% for Medicare. Although half of this 15.3% tax is deductible, this additional tax can sneak up on your clients.

Tax Considerations for Businesses Hiring Gig Workers

Businesses who hire gig works will likely find that their compliance efforts are much simpler than if they had hired employees. They don’t have to withhold income taxes or payroll taxes; they are not responsible for the employer’s portion of payroll taxes; and they do not have to pay for benefits. The main compliance requirement for businesses is filing Form 1099-NEC, Nonemployee Compensation.

Businesses must file Form 1099-NEC for each independent contractor they paid at least $600 in a given tax year. All contractor and gig worker payments should be reported on this form, which is new for the 2020 tax year. In prior years, payments to independent contractors were reported to the IRS on Form 1099-MISC. The IRS chose to separate nonemployee compensation from other miscellaneous income (like rents and attorney payments) to simplify filing deadlines. Miscellaneous income (now reported on Form 1099-MISC) is due on March 1st (if paper filed) or March 31st (if electronically filed) while nonemployee compensation (now reported on Form 1099-NEC) is due on January 31st. Failing to file either of these forms timely can cost your client a lot of money – $50 per missing report even if only filed a day or two late.

Trends for Gig Workers

As the gig economy grows, workers will likely demand better protections. In the future, we may see one or both of the following changes:

  • Lower reporting thresholds on 1099-NECs: By lowering the $600 filing threshold, businesses would be saddled with additional compliance requirements. But if your client keeps good records of their contractors, filing a few more 1099-NECs shouldn’t be too difficult for you to handle as a team.
  • Businesses can elect to withhold payroll or income taxes on behalf of their gig workers: We may also see legislation in the coming years that allows businesses to withhold payroll or income taxes on behalf of their workers whether they are true employees or long-term contractors. This would be an additional burden for businesses, but it may help them attract gig workers who want the freedom of working independently but dislike the idea of withholding and paying their own taxes.

If any of these trends come to fruition, our Corvee tax planning software for CPA firms will adapt to those changes and help you, as your client’s advisor, maintain compliance effortlessly. Right now, our tax software for CPA firms can help you:Support gig workers by:

Support gig workers by:

  • Calculating quarterly estimated tax payments
  • Calculating self-employment income
  • Calculating complex business deductions
  • Projecting income for planning purposes

Support businesses hiring gig workers by:

  • Reminding workers about Forms 1099-NEC
  • Projecting payments to self-employed workers

If you want to see a demo of our tax planning software for CPA firms, contact us today and request a demo.

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