Gig Worker Vs Independent Contractor: What's The Difference?

Highlighting the differences between gig workers and independent contractors

The terms "gig worker" and "independent contractor" are often used interchangeably, but they are, in fact, two fundamentally different roles. 

Gig workers perform short-term, flexible jobs through online platforms, whereas independent contractors are usually self-employed individuals or businesses hired to perform specific tasks or services. 

Independent contractors acquire their clients through various marketing channels, while gig workers generally work through online platforms like Uber or Upwork. 

Gig Worker Vs Independent Contractor: What's the Difference? 

Gig work is usually project- or task-based, and gig workers are typically paid for each specific job they complete. 

Examples of gig workers include freelance writers, ridesharing drivers, or individuals providing various services through work platforms, such as TaskRabbit or Lyft. 

Independent contractors have more control over completing their work, setting their rates, determining their working hours, and using their own tools and equipment. 

First, let's look at the components of each type of employment, and then we'll compare gig worker vs independent contractor employment. 

What Is a Gig Worker? 

Most gig workers enter the gig economy to earn part-time income to supplement full-time jobs or studies at college or university. 

They are engaged in short-term, temporary, or project-based work arrangements for companies providing an online platform to facilitate the hiring process. 

The gig workforce performs various tasks and projects, such as ridesharing, food delivery, content creation, graphic design, and online tutoring. 

Gig workers find jobs through online platforms, such as Instacart or Fiverr, and often have little say in their working rates. 

Working Independently 

Gig workers enjoy some flexibility in choosing when and where they work, but they often need to fit in with customers' schedules or availability. 

An upside to this type of work is that they typically work without long-term commitments to a single employer. 

They can choose to work as much or as little as they like based on their schedules or desired income level. 

For gig workers relying on the gig economy for their entire income, they may rely on multiple gigs or platforms to create diverse income streams. 

Building Their Portfolios 

Many gig workers use digital platforms to showcase their skills while building their portfolios so they can branch out later. 

The best gig economy jobs are often of short duration, as companies often use them to complete campaigns or projects that require extra staffing capacity. 

Payment is typically structured hourly or per project, and they receive 1099-NEC forms for income reporting as non-employees. 

Gig work is less complex than independent contracting, as gig workers are often treated as an extension of a company's normal payroll. 

The following gig work pros and cons may arise: 

Pros 

• Gig work offers flexibility, allowing workers freedom to choose when and where they work. 
• There is easy access to various short-term jobs and projects through online platforms. 
• There is immediate earning potential that can scale by taking on multiple gigs. 
• Barriers to entry are low as gig work doesn't require complex business structures. 
• Gig workers can easily switch between different tasks or projects. 

Cons 

• Gig work lacks long-term stability and consistent income. 
• Financial responsibility lies with the gig worker as they must make provision for payroll taxes, their own health insurance, and equipment expenses. 
• Gig workers must often accept contractual terms and working conditions that are less than favorable. 
• Compared to independent contractors, gig workers have limited negotiation power. 
• Gig workers must rely on gig platforms, which can limit their options and earning potential.  

What Is an Independent Contractor? 

Independent contractors (ICs) are hired to perform specific tasks or projects on a temporary or contractual basis but have more control than gig workers. 

For the most part, an independent contractor possesses a range of specialized skills and expertise with years of industry experience in a particular trade. 

They operate with a higher degree of independence than gig workers, deciding how to complete tasks and manage their work without much client input. 

Part of the process of obtaining work involves negotiating contractual agreements with their clients as they outline terms, conditions, and project details. 

Independent contractors have greater freedom to set pay rates and negotiate terms and fees with clients more directly than workers on most gig platforms. 

They are often better organized than gig workers and may operate under more complex business structures, such as LLCs or corporations, for legal protection. 

While ICs do market themselves on gig platforms, they also attract clients through personal websites, advertisements, or other promotional channels and personal referrals. 

They assume administrative responsibilities generally associated with employers, including health insurance, quarterly tax submissions, and other legal and statutory obligations. 

An independent contractor takes on personal liability for debts and other financial obligations unless they structure their business as an LLC or corporation. 

Here are some of the pros and cons of being an independent contractor: 

Pros 

• Independent contractors may charge more as they often possess more specialized skills. 
• They have more control over their business structure and operations than gig workers. 
• ICs enjoy greater control over setting pay rates and terms when negotiating with clients. 
• Through the use of LLCs or corporations, ICs have added legal protections and limited financial liabilities. 
• Rather than contracting through third parties, ICs sign contracts directly with their clients. 

Cons 

• ICs are responsible for managing all aspects of their business, including health insurance and legal obligations. 
• They may be personally liable for debts and financial obligations unless they are set up as an LLC or corporation. 
• Competition for work may be more difficult without the support of gig platforms. 
• They must wear many management hats and are often required to market their skills through business websites and ads. 
• Unlike gig workers, ICs must balance their available time between billable work and business management responsibilities. 

Key Differences 

In 2019, the Department of Labor classified gig workers as independent contractors, excluding them from conventional employee benefits, insurance, and retirement plans. 

There has been a shift under the latest administration, with the DOL's Wage and Hour Division rescinding the earlier stance and introducing a new categorization. 

Now, all forms of gig work are treated as traditional employment. As a result, California is currently in dispute with various organizations over its labor laws. 

The Fair Labor Standards Act provides for minimum wages and overtime pay, as well as recordkeeping requirements that affect gig workers directly. 

IRS Gig Worker Vs Independent Contractor Distinctions 

While the Internal Revenue Service doesn't make a distinction, "gig worker" often implies platform-based, short-term tasks, while "independent contractor" is a more formal term. 

The main difference is how jobs are sourced, with gig workers mostly finding jobs on gig platforms, such as Lyft, Fiverr, and Upwork. 

On the other hand, independent contractors usually work directly with clients and are free to negotiate terms, pay rates, and deliverables. 

Gig workers must work within platform constraints, whereas independent contractors are generally more free to negotiate. 

Gig platforms make it easy for workers to conduct business, with payment gateways and contracts governing how workers and clients interact. 

Independent contractors must create their own financial and business structures, using accountants and advisors to help create their business entities. 

They must discuss accounting for startups and have more complex business structures, such as LLCs or corporations, registered and managed by knowledgeable professionals. 

ICs must understand basic accounting principles and accounting terms to ensure they are paid on time and fulfill their tax obligations. 

These are not things gig workers generally have to worry about, aside from annual individual income tax submissions. 

Key Similarities 

Both gig workers and independent contractors generally receive payment for their work based on hourly rates or project-based fee arrangements. 

A customized payment structure is best suited to their work's temporary and flexible nature, allowing for compensation tailored to specific tasks or projects. 

Tax Classification 

Gig workers and independent contractors share a common tax classification as they both receive 1099-NEC forms for income reporting purposes. 

This tax form distinguishes them from traditional employees who receive W-2 forms, reflecting their status as non-employees responsible for managing their own tax obligations. 

They are responsible for filing estimated income tax submissions quarterly and final tax returns annually. 

Gig workers and ICs can make numerous deductions against their income based on the type of work they do and the extent of their expenses. 

Freedom and Flexibility 

One of the primary similarities is that they experience freedom and flexibility in their work arrangements not enjoyed by conventional employees. 

They have complete autonomy to choose how they approach their tasks, set their work schedules, and determine how they complete their assignments. 

This flexibility is a defining characteristic of their non-traditional employment status and allows workers to work from home or abroad. 

Short-Term Assignments 

Gig workers and independent contractors are typically engaged for only short periods or specific tasks, which can be negative or positive. 

Whether completing a particular project or contributing expertise for a limited duration, their work arrangements are often characterized by a lack of long-term commitment. 

This is fine if the worker doesn't require full-time income, but it can become problematic if they rely on gig work to survive. 

Varied Work Locations 

Gig workers and independent contractors are generally not tied down to working from a single location and can move around as they wish. 

So long as they have access to an internet connection, the gig economy rewards them by allowing for complete location independence. 

The nature of their employment allows for remote work, enabling them to choose where they wish to work, from the local coffee shop to overseas. 

This flexibility aligns with gig economy trends in the modern workforce, emphasizing the importance of independence for gig workers. 

These similarities underscore the most important characteristics shared between gig workers and independent contractors, emphasizing common threads defining non-traditional employment arrangements. 

What the Law Says 

Effectively managing tax liabilities is a point of stress shared by gig workers and independent contractors. 

Given their non-employee status, individuals in these roles must grasp basic accounting principles and adhere to a tax prep checklist when filing their taxes independently. 

Being designated as 1099 contractors rather than W-2 workers, gig workers and independent contractors are tasked with accurately tracking their financial transactions. 

Another accounting tip is for both gig workers and independent contractors to set aside funds each year to meet their tax obligations. 

This proactive approach contrasts with W-2 workers having taxes automatically withheld from their pay and only needing to submit their annual returns. 

A Lack of Retirement Benefits 

To make the most of their situation when filing their taxes, gig workers and ICs can benefit from understanding various accounting terms and exploring investment options. 

They don't have the benefit of company retirement plans, so they should take advantage of retirement accounts, such as SEP-IRAs and Solo 401Ks. 

The IRS doesn't distinguish between gig workers and independent contractors, but various laws govern their status in different states. 

State laws vary; California's AB5, for instance, distinguishes between gig workers and traditional independent contractors, even if the company is out of state. 

Some states, such as New York, have laws to protect freelancers' rights, ensuring timely payments and written contracts, in terms of the "Freelance Isn't Free" Act. 

The legal landscape is constantly evolving, and there are currently challenges to various laws governing relationships between gig economy workers and businesses.  

The Future of Gig Work & Independent Contracting 

Significant numbers of workers are opting to join the gig economy, either by choice or due to contractions in the traditional labor market. 

This has increased the pressure on gig economy companies to offer some of the same benefits of traditional employment. 

We are already seeing how labor law updates impact how businesses engage gig workers and independent contractors. 

To remain competitive, companies increasingly rely on freelancers, dramatically influencing company cultures and affecting team dynamics and productivity. 

Aside from the effects on company culture, minimum wage rates for gig workers contribute to financial stress, which raises questions about its long-term sustainability. 

Therefore, businesses must weigh pros and cons when incorporating gig work into their models, considering fairness, sustainability, and cultural impact. 

Summary 

After delving into distinctions between gig workers and independent contractors, it is evident there are subtle differences between them. 

Despite these differences, the IRS treats them similarly, with some small differences in tax deductions and applicable credits based on contracts. 

As the gig economy continues to grow, companies are under increasing pressure to address the well-being of gig workers, with consequent changes in labor laws.