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Breaking down the gig economy: Key terms to know

Familiarize yourself with a few of the gig economy’s main concepts

Freelancing has seen a substantial increase over the past few years – as of October 2016, as many as 68 million Americans were working through gigs and freelance jobs. That’s more than 1 in 3 workers.

As the gig economy grows, here are a few basic terms to know.

What is the gig economy?

The gig economy is the term for a labor market where contractors and freelancers are paid according to short-term assignments and tasks, rather than full- or part-time jobs. In the gig economy, workers are paid for completing each individual “gig,” which may come in the form of rides completed, meals delivered, repairs finished, etc.

Recently, the gig economy has come to include innovations like ride sharing services, though it can also include services such as tutoring, music lessons, home repairs, and more.

What is a freelancer?

A freelancer is an individual who works under this gig economy structure, typically on a task-by-task or project-by-project basis. Freelancers’ clients can be either businesses or individuals – for instance, being hired to develop a company’s website is a freelance gig, as is being hired to paint a room in someone’s home. Freelancing exists in essentially every industry, though common ones include writing, web development, and accounting and bookkeeping.

Pros of freelancing:

  • Variety of work and entrepreneurial potential
  • Ability to determine your own hours and schedule
  • Power to control your price point and earnings (depending on your industry/type of freelance work)
  • High, and growing, demand for freelancers
  • Opportunity to earn part-time income, or make a gradual transition into the labor market

Cons of freelancing:

  • Income inconsistency, due to the ebb and flow nature of projects
  • Inability to control rates (in certain fields)
  • Lack of standard worker protections and benefits, such as health insurance, retirement planning, and paid time off
  • Responsibility for payments such as income taxes and Social Security

How are freelancing and contracting different?

Though similar, the main difference between contractors and freelancers is that contractors are hired by a certain company for a position that lasts a pre-designated period of time, as opposed to freelancers’ project-by-project structure. Health care and education are top industries for contracting, and other common industries include construction, maintenance, and childcare.

The main benefit of contracting is the potential for higher income. However, contractors also make a larger base pay partly because they don’t receive benefits or get taxes taken directly out of their paycheck. Contractors are also subject to a lack of job security, with 18.4 percent of independent contractors reporting having been laid off in the past year – and as contractors, they aren’t eligible for severance pay.

How do freelancers and contractors file taxes?

Freelancers and contractors often file taxes with 1099 forms, the self-employed worker’s equivalent of a W-2. They receive a separate 1099 form from each client that paid them at least $600 that year, which the client is responsible for sending by Jan. 31.

In instances where the client doesn’t provide a 1099 (for instance, it’s unlikely that a piano teacher would receive a 1099 from a student), the freelancer is responsible for keeping accurate records of their income and independently reporting it to the IRS at tax time.

You can learn more about taxes and how they vary from person to person at the Wells Fargo Tax Center.

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