Contract Work Changing the Accounting and Payroll Landscapes

Contract Work Changing the Accounting and Payroll Landscapes

Every day, tens of millions of Americans and Europeans get up, go to work for an employer, then return home at the end of the day while those companies keep rolling on without them. It is a model that has been the standard since the Industrial Revolution. But how long will that model last? Is it possible that independent, contract work could transform the workplace within the next couple of decades or so? It's possible, and there is evidence that it's already happening.

A report by the McKinsey Global Institute suggests that the commonly understood statistics relating to independent and contract work in the U.S. and the EU-15 are probably not accurate. Furthermore, they are probably too low. The Institute says that as much as 30% of the entire labor force in the U.S. and EU-15 consists of independent workers and contractors doing temporary work. That represents more than 162 million workers.

McKinsey analysts say that government data collection methods and technologies are insufficient in light of the emerging gig economy. The report specifically states that government data collection is "insufficient, outdated, and too narrow to capture the full range of economic activity that is taking place."

To summarize, the McKinsey Global Institute believes the actual number of independent and contract workers is being underreported because governments do not have updated methodologies and technologies to account for the changing employment landscape. If true, and there is no reason to believe it's not, the Institute's report seems to also imply that independent contract work is also changing the accounting and payroll landscapes.


How Companies Classify Workers

Here in the U.S., one of the reasons we might be underreporting contract and independent work is the fact that the IRS still doesn't provide hard and fast rules that make it easy to identify contractors. There are guidelines in place, but those guidelines can be ambiguous to some degree. How many workers are currently classified as salaried even though they are truly contractors, simply because companies unable to make sense of the guidelines err on the side of caution? Probably quite a few.

How workers are classified continues to be one of the most important aspects of payroll compliance as well. The worker employed in a strict, traditional sense is subject to all the payroll taxes companies are required to address through in-house accounting and payroll. Contractors still pay those taxes too, but they are responsible for doing things themselves. The employer does not withhold taxes and make payments on behalf of the contractor.


Changing the Way Payroll Operates

The emerging gig economy is starting to change virtually every business sector. It is even changing how payroll operates. Over the years, we've seen a steady increase in the number of service providers offering online payment solutions with customized products for individual industries. We are a good example here at BenefitMall. While we offer general payroll services for companies in nearly every sector, we have specialized solutions for the construction and restaurant industries.

Firms like ours are now in greater demand as small businesses grapple with the emergence of independent and contract workers. Rather than trying to keep what is becoming increasingly complicated in-house, companies are turning to online payroll providers capable of handling the job more efficiently and cost-effectively.

It could be that we don't really know just how many independent and contract workers are truly out there. But their numbers are growing. Perhaps they will become the dominant players in American business and industry within the next couple of decades. If so, they will completely transform accounting and payroll as we know it.



Bloomberg BNA –