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July 8, 2024
In a standard employment scenario, where a company hires an employee, the regulations to follow are established and the processes to comply with them are relatively well known. In gig work, there’s more variability. Some companies will be better suited to operate with the standard employment scenario. Other companies may be able to operate purely with independent contractors. And another set of companies will need to do both for different types of workers. Complying with regulations for employees is currently more onerous, however recent developments are creating more laws to provide protections and benefits for independent contractors.
Complying with regulations is critical as the fines for violations can quickly become large. For example, if you are required to provide healthcare insurance to employees and don’t, the fines are on a per violation basis. Meaning that every employee you didn’t offer healthcare insurance to could cost you $4,460. Gig platforms with 1,000 workers that offer no healthcare insurance could be assessed more than $4M in fines. For companies with W-2 employees, instances where a person who is ineligible to work is hired could result in a fine of more than $28,000, per violation.
In this guide we’ll give you an overview of the most important gig worker compliance requirements and provide some advice on easy ways to comply.
Workers can either be an independent contractor, often called a 1099 worker because of the IRS form the worker is required to file for taxes, or a W-2 employee, called this because of the form the employer files with the IRS for taxes. When it comes to worker classification The US Department of Labor is concerned with maintaining worker rights and enforcing the Fair Labor Standards Act (FLSA). This is for a few reasons. They primarily care about misclassification of employees as independent contractors as it may deny workers minimum wage, overtime pay, and other protections.
As part of its efforts to address misclassification, the Wage and Hour Division on January 10, 2024 published a final rule, effective March 11, 2024, revising its guidance on how to analyze whether a worker is an employee or independent contractor under the FLSA. This guidance is available in the form of regulations at 29 CFR 795. This outlines 6 factors that should guide employers and platforms in their process of determining whether workers are 1099 contractors or W-2 employees
Once you've determined if your workers are 1099 independent contractors, W-2 employees, or both, it's time to make sure you're taking appropriate action to operate within regulations.
When classifying a worker as a 1099 independent contractor, companies need to be most concerned with the following compliance requirements.
First you’ll need to collect a Form W-9 from each 1099 worker. This document is essential as it provides you with all the information required to file for a contractor’s end of year 1099 and to perform new hire contractor reporting to states that require it. In addition to collecting the form, it’s recommended that platforms store copies of Form W-9 for three years following the last tax year in which a Form 1099 was filed for that worker.
Several states require employers to report independent contractors as “new hires” quickly after contracting them. For example, in Florida, employers must report 1099 contractor new hires within 20 days of the worker’s contractor hire date.
With 1099 contractors, employers need to keep track of non-reimbursement earnings (such as pay for work performed) and reimbursement earnings (such as refunding the worker for a supply purchased). These earnings will be reported separately on the workers 1099, so the worker can be taxed correctly.
While the law has been interpreted differently over the years, The Office of Child Support Enforcement (OCSE) leaves little room for confusion as to whether child support garnishment applies to independent contractors at this point: "If you receive an Income Withholding Letter for a nonemployee, and you make payments to that person, you must withhold child support from those payments." Income Withholding Letters are typically mailed to a business and require quick turnaround action for the business to execute. The garnishment payment needs to be sent directly to the child support recipient.
Finally, at the end of the year companies must track wages for all workers and issue a 1099 for workers who earned more than $600 in wages per year. Form 1099 is not only reported to the IRS, but also to all states that require it. Oftentimes, a percentage of workers will review the 1099 and require a correction due to qualifying life events, manual clerical errors, etc. It will be your obligation as an employer to amend the 1099s by issuing a 1099-X and re-reporting to the IRS and states each time this change is made.
When classifying a worker as a W-2 employee, companies need to be most concerned with the following compliance requirements.
Employers often require W-2 employees to sign an offer letter, labor poster, and other documents required of your company. Employment documents like offer letters are highly regulated and require long term record retention and storage. For example in California, offer letters are recommended to be stored 4 years after an employee departs.
W-2 employees are taxed, and it’s essential to provide the proper withholding certificates for employees to fill out. Normally employees will sign a Federal W-4 and a State W-4. In some cases employees may need to fill out multiple state withholding certificates if the employee is working and living in a different state, or if they are working in multiple states.
Employers must determine whether their employees are eligible to work in the United States. It is the employers’ responsibility to make sure that a Form I-9 is correctly filled out, that documents are properly reviewed, and verify that the employee is qualified to work.
Several states require platforms to report W-2 employees as “new hires” quickly after employing them. For example, in California Employers must report new hires to the state within 20 days of employing them.
Employers must properly record work performed by W-2 employees and associate those with the proper earning components. For example, bonuses and normal wages should be separate earnings components as there are different tax implications for those different earnings.
As an employer, you are responsible for taking information collected from withholding certificates and reviewing the Federal, State, and Local guidance for tax calculation formulas. In the United States there are more than 11,000 tax jurisdictions which can cause a huge burden for employers to manage this. This is one reason most employers outsource W-2 employee calculations to a payroll provider. some text
For gig work there are unique challenges such as multi-jurisdiction taxation. This involves taxing an employee that may work in multiple tax jurisdictions in a given day or week OR taxing an employee that works and lives in different locations. After calculating the taxes, the employer must pay each individual tax agency on a dynamic schedule and file a summary of the worker earnings and taxes collected to the tax agency. This schedule is determined by both the payment schedule the tax agencies assign to the employer as well as triggered by the volume of payments an employer has aggregated. This is another tricky process that’s often outsourced to payroll service providers.
While there’s previously been ambiguity over garnishments of wages for independent contractors, there’s been clarity for W-2 employees. If an employee owes child support and an Income Withholding Letter is issued, it’s the employers responsibility to garnish the wages of the employee, correctly calculate net payment, and send the garnishment payment directly to the child support recipient.
Each state prescribes individual guidance on the pieces of information they’d like included on each paystub and the methods by which paystubs are provided to W-2 employees. Normally the information has details such as rate of pay, date of work performed, date the payment was issued etc. Some states like NJ and IL have temporary worker specific rules for paystubs. For example in NJ paystubs must include details like information on all the 3rd party clients the gig worker has worked for. While the interpretation of the laws allows for paystubs to be delivered digitally, states vary on how they allow employees to opt-in or opt-out of paystub delivery methods.
When a W-2 employee is terminated, there are strict guidelines prescribed by the state on how quickly the employer must issue the last payment to the employee. In California for example, terminated employees may be required to be paid the very next business day after termination.
The main benefits that employers are required to provide to employees are healthcare insurance and retirement savings, however this too varies by state. The Affordable Care Act (ACA) requires employers with over 50 full-time employees, or full-time equivalents (FTEs), to be offered a minimum viable insurance plan. For retirement savings, there are states like California who have laws that require employers with at least 5 W-2 employees must offer a minimum 401K program such as CalSavers.
As shown above, the compliance requirements for employees is much greater than the requirements for independent contractors. However, states like Massachusetts have agreed to a settlement with Uber and Lyft that they will continue to classify their workers as 1099 independent contractors but be required to provide a minimum wage, paid sick time, paid family and medical leave, healthcare insurance, and more. As gig work becomes a larger part of the overall workforce and economy, companies should expect to see more developments that bring W-2 like protections to 1099 workers.
If you’re still curious about gig employment compliance, or want to know how you can easily comply with 1099, W-2, or both types of worker regulations, please get in touch with us.
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