If your organization is considering freelancers to fill certain roles, you need to know the pluses and minuses of freelancer payment strategies.

More workers are freelancing by choice, according to The Freelancers Union, and half of all "freelancers say they would not quit freelancing and take a traditional job with an employer—no matter how much it paid." They cite greater freedom and increased flexibility, both facilitated by home-based and mobile technology.

In fact, according to the report, nearly 54 million Americans — 34 percent of U.S. adult laborers — have worked as freelancers in the past year.

Growing Prevalence

A recent Forbes report lists marketing, web development, editorial, accounting, graphic design and teaching as fields likely to continue to use freelance workers. The shift to gig employment means you and your human resources executives need to discuss not only freelancer payment strategies, but also what implications they might have for your business model.

Advantages and Disadvantages

Freelance workers offer you several apparent cost-cutting advantages. The IRS notes your firm doesn't have to withhold income, Social Security or Medicare taxes for bona fide freelancers. Nor, usually, do you need to provide such benefits as health insurance or paid vacation; however, there may be a penalty for not providing minimum value health insurance under the terms of the Employer Shared Responsibility provisions of the ACA.

But freelance workers come with drawbacks. Freelancers work for the highest bidder; you may also be competing for that worker's time, attention and effort with several other employers. Your firm can't oversee exactly how freelance workers complete assigned jobs — and in fact, in a true independent contractor relationship businesses generally cannot direct, supervise or control how the worker performs their job.

Be aware, however, that the IRS and state agencies often consider most workers as employees, and apply rigorous standards on firms to demonstrate that a worker is a true contractor.

Tax Compliance

"It is critical," says the IRS, "that business owners correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors."

An employee is not an independent contractor, according to the IRS, "if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed."

According to the IRS, facts that provide evidence of the degree of control and independence fall into three categories: behavioral (whether your organization controls or has the right to control what the worker does and how the worker does his or her job); financial (the business aspects of the worker's job controlled by you the payer, such as how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.); and type of relationship (written contracts, employee type benefits or if the work performed is a key aspect of the business).

Businesses must weigh all these factors when determining whether a worker is an employee or an independent contractor. Some factors may indicate that the worker is an employee, while other factors may indicate that the worker is an independent contractor. "There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors that are relevant in one situation may not be relevant in another," according to the IRS.

Payment Reporting

As part of your freelancer payment strategies for independent contractors, you will have to supply your worker with IRS Form 1099-MISC, Miscellaneous Income, to report payments for services performed. You must generally report a payment as non-employee compensation if you made the payment to/for:

  • Someone who is not your employee.
  • Services in the course of your trade or business.
  • An individual, partnership, estate or in some cases, a corporation.
  • The payee of at least $600 during the year.

Misclassification can create tax liabilities, fines and penalties for your business. The U.S. Department of Labor, which has found deliberate misclassification of employees as independent contractors in "an increasing number of workplaces," applies strict standards to independent contractor status and works aggressively with the IRS and state agencies to combat misclassification, as well.

The onrushing gig economy offers many chances for your company to secure quality skills and workers. But be aware that the new freelancer payment strategies mean you must pay sharp attention to new methods of payment and payment compliance.

Tags: Payroll Tax Compliance