Gig worker vs. independent contractor: which one is right for your business?

Pedro Barros, a seasoned leader at Remote, shares his expertise in our new thought leadership series on contractor management. Drawing from extensive interactions with contractors and customers, Pedro explores industry challenges and discusses how Remote's platform offers reliable, efficient solutions.

As more companies look for cost-effective alternatives to full-time employees or want to find workers for short-term projects, it becomes important to clarify the difference between gig workers and contractors — especially as these terms are often used interchangeably (though they aren’t quite the same).

The idea of 'gig work' has been around for a while, as there has always been a need for temporary services. However, it was during the height of the COVID pandemic that the concept of gig work and the larger gig economy gained attention.

In recent years, global companies have faced class-action lawsuits due to the incorrect classification of workers, making it even more important to understand the distinction, however subtle, between worker classifications.

In this article, we’ll explore the key differences between gig workers and contractors, the changing nature of gig work and contracting, and how they’re both likely to impact the future of work. Finally, we explain the factors you need to consider before hiring gig workers or contractors.

Gig worker vs. contractor: What’s the difference?

While the US Internal Revenue Service (IRS) identifies both gig workers and independent contractors as self-employed individuals, there are slight differences between the two. 

Having a good grip on the nuance between the two is crucial for both workers and businesses so that they can effectively manage expectations, responsibilities, and legal implications.

The IRS views each of these rules like this.

Independent contractors

According to the IRS, an independent contractor is someone who provides services to another business entity (under terms specified in a contract or a verbal agreement), without being subject to the control of the other entity, on how the service is performed (for example, this could leave them free to outsource particular tasks). 

This means that independent contractors have the freedom to determine how to complete their work, though the entity paying them may have requirements for the delivery and scope of the final product, project, or result.

Gig workers

Gig workers are a type of independent contractors who typically engage in on-demand work, short-term jobs, or freelance tasks. Their work is often found through online platforms (or apps) that connect them with clients or customers. Gig workers are typically not bound by contractual obligations and may take on ad hoc tasks as and when required by their clients.

Drivers for ride-sharing services are an example here; or freelancers who find graphic design work through online platforms, as well as people who perform ad-hoc jobs, or temporary tasks advertised through multiple apps or forums.

How do taxes work for both types of workers?

Contractors and gig workers are responsible for managing their own taxes, as they do not have taxes automatically withheld from their payments like traditional employees. They need to calculate and pay their own income and self-employment taxes. This requires them to keep accurate records of their income, expenses, and any deductions they may qualify for.

Additionally, they often need to make quarterly estimated tax payments to avoid penalties. It's crucial for contractors and gig workers to stay updated on tax laws specific to their region, as these can vary widely

For tax purposes, businesses must keep in mind that if they are hiring US gig workers or independent contractors (irrespective of the country they are based in), the workers are responsible for reporting their income using Form 1099-NEC if they earn $600 or more.

The workers are also responsible for paying self-employment taxes, which cover Social Security and Medicare contributions, and they may need to make estimated quarterly tax payments to the IRS.

Contractor Management —

8 min

Remote Contractor Management: Tax compliance for US companies just got easier

We’re excited to share the details of our new tax compliance feature for Remote’s Contractor Management platform, specifically designed to help HR and finance administrators meet IRS rules. 

The key distinction made by the IRS does not necessarily separate gig workers from independent contractors but rather includes gig workers within the broader category of independent contractors, emphasizing the nature of their employment status as self-employed individuals.

Gig work and contracting models are shifting, driven by rapid technological developments, changing workforce demographics, and evolving business models.

The growth of the gig economy will be shaped by multiple factors — the rising cost of living, the desire for people to have more control over their work-life balance, and flexibility becoming increasingly important and valuable to workers.

This could mean we’re on the cusp of a work revolution, though it felt the same during the remote work boom at the height of the Covid pandemic. Since then, we’ve also seen a reversal of this trend, as hybrid and return-to-office mandates came into full swing. Either way, the world of global employment has changed, and both employers and workers should plan to benefit from new ways of working.

Here are some trends that are likely to impact businesses and workers alike.

Expansion into new industries

While gig work is widespread in tech, creative, and customer service roles, it’s branching out into other spaces, like healthcare, education, and finance. This diversification will provide more opportunities for professionals with different skill sets to engage in gig work.

Regulatory changes and worker rights

As the gig economy grows, so does advocacy around worker rights and benefits. There is an ongoing debate about the classification of gig workers and their entitlements. Future regulations may require companies to provide greater protections and benefits to gig workers, such as health insurance, retirement plans, and minimum wage guarantees.

The growing role of tech and automation

Artificial intelligence (AI) and automation are expected to impact the gig economy significantly. While many routine tasks will be automated, there will also be new opportunities for gig workers to collaborate with generative and responsive AI tools for increased productivity, and tapping into new creative outlet mediums (like Midjourney for AI image generation). 

The rise of the sharing economy

Another pivotal trend is the continued growth of the sharing economy, a model where people rent out their personal items or assets (as well as services) for a fee. Think clothing rental platforms like Hurr, vacation property rental giants like Airbnb, or taxi platforms like Uber. This type of economy will only expand, creating fresh prospects for both gig workers.

The evolution of digital platforms

Online hubs, portals, websites, and apps that connect freelancers with businesses are becoming more sophisticated. These platforms (such as Remote’s Freelancer Hub) make it easier for gig workers to find commissions, manage projects, and receive payments. As these platforms develop, they tend to offer more opportunities across a wider scope of industries, not just traditional freelance sectors like writing and graphic design.

Contractor Management —

17 min

Independent contractor vs. employee: which should you hire?

Understand the key differences between independent contractors and employees and determine which arrangement might work best for your business.

Businesses must adapt and rethink traditional employment models, to integrate and manage a more fluid workforce effectively. 

You can get a head start on this by:

• Updating policies to ensure compliance. Adapt existing HR policies to accommodate the unique aspects of gig work, including flexible scheduling and remote work guidelines. Ensure that all policies comply with labor laws and regulations related to gig workers, which can differ significantly from those for full-time employees.

• Improving recruitment and onboarding processes. Tailor recruitment strategies to attract high-quality gig workers via specialized platforms and networks that cater to freelancers. Develop a streamlined onboarding process for gig workers that includes training on company culture, communication tools, and job-specific tasks.

• Investing in tech and infrastructure. Implement technology solutions that facilitate the management of a blended workforce, such as platforms for tracking work hours, project management, and communication. Ensure that technology solutions comply with data protection regulations, especially when gig workers access company systems remotely.

• Considering worker classification risks. Carefully review the legal criteria for classifying workers as independent contractors to avoid misclassification and potential legal issues. Also, gig workers should be treated fairly in terms of payment, opportunities, and working conditions, even if they do not have the same rights as full-time employees.

• Developing flexible workforce plans. Make flexible workforce plans that you scale up or down based on business needs, using gig workers to manage fluctuating workloads. Also, make sure you Identify and mitigate risks associated with gig work, such as dependency on key freelancers or issues with quality control.

If you're considering a business model that relies heavily on gig workers, there are several important factors to keep in mind to make your business sustainable. 

The key here is to build a robust business model that leverages the benefits of the gig economy while minimizing potential drawbacks. Here are a few pointers to consider.

Regulatory compliance

Make sure you understand the legal framework governing gig workers in your jurisdiction. This includes labor laws, the classification of gig workers versus employees, and any specific regulations related to gig economy businesses. Non-compliance can lead to legal challenges and financial penalties.

Worker classification Properly classify your workers to avoid legal complications. Misclassifying employees as gig workers can lead to lawsuits, back payments for benefits, and other penalties. Be clear about the distinctions in terms of control, payment, and the work performed.

Scalability and flexibility

One of the advantages of using gig workers is the ability to scale your workforce up or down based on business needs without the typical overhead associated with full-time employees. Plan how to manage fluctuating demand and maintain a flexible pool of reliable gig workers.

Technology and infrastructure

Invest in the right technology to manage your gig workforce efficiently. This includes platforms for scheduling, communication, task management, and payment processing. Technology not only helps simplify operations but also improves the gig worker experience.

Payment systems

Consider how you will compensate freelancers or gig workers compliantly. Transparent and timely payment systems help in retaining good workers. Explore different payment models, such as per-task payments, hourly rates, or performance-based incentives. Learn more about how Remote makes contractor payments quick and easy.

Risk management

Identify and manage risks associated with using a gig workforce, including data security, worker reliability, and compliance with industry standards. Consider insurance and other protective measures to mitigate these risks.

Looking to hire independent contractors or gig workers?

Hiring independent contractors or gig workers could be what your business needs to get to the next level — from increased flexibility and specialized skills to financial advantages.

However, businesses should also consider the potential drawbacks of working with workers in the short term, including compliance risks and the legal risks of misclassification. Careful planning, clear communication, and thorough legal agreements are essential to harness the benefits of working with independent contractors while minimizing the cons If you’re looking to find talented contractors around the globe, check out Remote Talent to connect with top candidates.

Also, check out Remote’s contractor management platform if you’re looking for a fast and efficient way to manage, hire, and pay global contractors.

Contractor Management —

10 min

The future of gig economy and its impact on work

Learn more about the gig economy and uncover insights into its future impact on the workforce in our article.

Contractor Management —

17 min

Independent contractor vs. employee: which should you hire?

Understand the key differences between independent contractors and employees and determine which arrangement might work best for your business.