Here's How to Understand and Help Gig Workers

(Credit: Jeenah Moon)

With Americans facing record-breaking inflation rates and concerns of a recession on the horizon, the hourly workforce is looking towards gig work to fill in the gaps and make ends meet. In fact, a recent report revealed that a remarkable 36% of Americans identified as gig workers last year.

So what really is the gig economy and why is there so much hype surrounding it? The gig economy is defined as a worker’s market known for short-term freelance and contract-based work. And while the gig economy has historic roots that date back to the early 1900s, we’ve seen an explosion in its popularity over the past few years. Why? Because the COVID-19 pandemic significantly altered the needs of hourly workers, causing employees across industries to re-evaluate priorities with regard to work-life balance.

While the majority of office workers were able to transition to a remote workflow, the same was not possible for hourly jobs. And the modern hourly workforce wants – and deserves – the opportunity to choose work hours that fit within their lifestyle, not a lifestyle that’s built around work. During the pandemic, gig work such as driving (Uber, Lyft) and delivery services (Amazon, DoorDash) – to name only a few – has become so much more popular in terms of job opportunities, that experts project over 50% of the U.S. workforce is likely to participate in the gig economy by 2027.

However, while picking up a new side gig may seem like a good idea for some fast cash, what gig workers might not know is the hidden burdens that a formal 1099 position can place on their shoulders.

The hidden burdens of 1099 work

What many gig workers might not realize is they are required to pay more in taxes and are vulnerable to tax implications associated with 1099 work. Many 1099 workers make the mistake of viewing gig work as “tax-free” and don’t set aside money for their tax payments at the end of the year. And since those taxes are not automatically withheld from their paycheck, these workers are often left on the hook for a surprising amount of federal, state and local taxes come April. And unlike W-2 employment where employers are required to cover half of all payroll taxes (about 7.5% of wages), 1099 workers pay roughly 15% of payroll taxes entirely on their own – and these self-employment taxes can really add up.

What’s more – many gig workers are filing their taxes incorrectly, leading them to spend more than what’s required. According to tax platform FlyFin AI, independent workers overpay their annual taxes by an average of $3,000. This overpayment often stems from not properly tracking one’s side business expenses and not knowing which expenses to deduct. Plus, depending on where you reside, your tax payments will vary. So while all freelancers and gig workers must pay federal income tax and FICA tax quarterly to avoid penalties, only some are required to pay additional state and local taxes. This means that independent workers must be aware of their own state and regional-specific tax policies in order to avoid penalties, or worse: an audit on their taxes.

The hard truth is that when you work for yourself, you aren’t guaranteed access to the protections often provided by corporate employers. This includes things like 401(k) plans, health insurance, unemployment insurance and worker’s compensation. Without these protections provided by your employer, workers will need to handle these on their own, which in many cases is more expensive. Plus, 1099 workers are not eligible for overtime pay rates (time and a half for hours worked beyond 40 hours a week).

Additionally, short-term, contract-based work opportunities are often unpredictable, which can cause increased anxiety and depression for workers. And while a recent survey revealed that 39% of hourly workers are more likely to stay with a job that prioritizes their mental health and wellbeing, hourly workers need the stability of regular paychecks now more than ever.

Why W-2 is the solution

While the gig economy introduced a new labor model – one that provides hourly workers with opportunities to make a livable wage with the perk of unmatched flexibility – it is lacking in other aspects. Specifically, we’re talking about the benefits, protections, and career advancement offered to the W-2 workforce.

Luckily for today’s hourly workers, they have access to platforms that offer the best of both worlds, merging gig-style flexibility with the benefits and stability of W-2 employment. Leveraging a W-2 model provides workers with the protections they need – including unemployment insurance, timely payment, overtime pay, medical and family leave, and workers comp – all without sacrificing flexibility. Plus, as mentioned earlier, workplaces are required to cover half of all payroll taxes for W-2 employees – that go towards social security and Medicare – taking a chunk of these expenses off the shoulders of the employee.

And while many gig-type jobs can come and go within the course of a year, W-2 platforms can provide workers access to roles that span months or even years, while offering the same flexibility and ‘dealer’s choice’ as other gig platforms. This allows workers to decide where and when they want to work, while also giving them the freedom to choose ‘for how long,’ so they don’t have to worry about being out of work or without consistent pay, which is especially critical as 64% of Americans are currently living paycheck to paycheck.

Looking towards the future

While the gig economy is expanding 3x faster than the full-time workforce, more than half of all gig workers don’t have access to employer-provided benefits. This means they’re spending out-of-pocket for critical services (like medical and dental appointments – which 42% of Americans report skipping due to cost), or omitting them altogether (not contributing to social security, for example).

For hourly workers looking to reap the benefits of flexible, gig-style work, without the pitfalls associated with 1099 employment, they must first arm themselves with the knowledge of the burdens that can come with gig-style employment, and take the necessary steps to mitigate these risks while keeping cash coming in.

Matt Laurinas, Chief Customer Officer, Bluecrew