There is an estimated 54 to 68 million Americans — 20% to 30% of the working population — now working “on-demand” as contractors and freelancers, according to the McKinsey Global Institute. Small business owners should be asking themselves whether and how to tap into this resource. (The Bureau of Labor Statistics will be collecting data this month on independent contractors to provide a more accurate number.)
What are small businesses doing now?
Despite the availability of talent in the gig economy, it seems that most small businesses prefer to rely on employees to operate their businesses. According to a flash poll by Manta in mid-April 2017, only about a third (36%) of small businesses currently engage contract workers and freelancers; 85% are not planning on using this outside talent in 2017. Of those businesses that use freelancers and contractors, 75% don’t provide them with any benefits (other than the agreed upon compensation).
Finding outside workers
Nonetheless, as the job market continues to tighten, making it difficult to find qualified employees, more small businesses may be forced to rely on outside workers to get things done. There are two main ways to find outside workers:
- Use temp agencies. In this situation, the worker is an employee of the agency that sent them to you. The engagement can last as long — or as short — as your needs dictate. You pay the agency an hourly rate based on the type of worker provided (e.g., clerical, tech, accounting, engineering, sales).
- Engage directly through online sites or personal connections. You pay the worker directly and, if compensation for the year is $600 or more, you must issue Form 1099-MISC to report your payments. Online sites for finding freelancers include Freelancer, Guru, and Upwork.
Using contractors and freelancers may meet business needs. However, there are several potential problems you want to avoid:
- Suitability. Finding the right person for the work you need to get done isn’t easy.
- Liability. Make sure your carrier covers you for potential issues regarding contractors. Are you protected if a freelancer is injured on your premises? Are you protected if the freelancer causes injury to a third party? Companies are not required to provide workers’ compensation for contractors, but may be permitted to do so (this option varies from state to state). Or, depending on the nature of the work they perform, you can be protected if the contractor has his/her own insurance.
- Challenges to worker classification. The IRS, along with other federal and state agencies, want to be sure that your treatment of a freelancer as an independent contractor for whom no payroll taxes are required is the correct treatment. The government prefers workers to be treated as employees to collect taxes and protect workers. But if you don’t exercise employer control over when, where, and how the work gets done, then likely your treatment of these contractors and freelancers as just that (and not employees) is correct.
- Expanded responsibilities. The number of employees on your payroll dictates the federal, state, and local laws to which you are subject. For example, the Affordable Care Act — which may be repealed and replaced — currently requires employers with 50 or more full-time/full-time equivalent employees to provide health coverage to full-timers or pay a penalty. Similarly, companies with 50 or more employees must offer leave time under the Family and Medical Leave Act. Contractors are not taken into account in determining these and other employer responsibilities.
The future of the workplace is changing in light of continued corporate layoffs (after which many turn to contractors), online freelance sites, and the shift in attitudes by workers and companies on the gig economy. What does all of this mean for your company?