The Great Resignation may technically be behind us, but the ripple effects are far from being complete. More than ever people are pursuing a side gig in addition to a job (full- or part-time). In some cases it’s out of economic necessity, while in others it can be for a lifestyle choice or based on employment options. But what exactly does that mean for 1099 and tax reporting? Essentially, we’re about to hit the “Great Confusion” for tax season.

Let’s look at the groundwork. COVID-19 accelerated an already growing trend. Workers were displaced and businesses shut down. Many people were out of work and needed to find something quickly. There was also an explosion of resources and sites to support gig work.

Hiring is hard and very expensive – the work force participation rate in the U.S. continues to decline since 2020. Baby Boomers retiring, the recession of 2008 and COVID-19 all had an impact. There is a shrinking talent pool available, which makes it harder and more expensive to hire. Therefore, hiring outsourced talent is more appealing for businesses – and creates more flexibility for workers.

Retaining employees is also difficult, as workers feel more empowered than ever to pursue what they want rather than settling for what they have. They also have lots of options and gig work makes it easier to maintain an income stream while they switch or look for a new full-time job. Individuals can also work multiple gigs to pursue varied interests.

What does this mean for taxes?

When it comes to 1099s, we can expect the benefits of access to top level talent to fulfill business needs without having to take on the overhead of an employee. There is a flexibility to bring on talent for projects or temporary initiatives without having to commit.

There will also be continued challenges in how to classify workers as the rules evolve. This continues to get more government scrutiny because of how this issue can contribute to the tax gap.

From a tax perspective, this all creates additional challenges in tracking and classifying a contractor versus an employee, and with administering employee tax reporting: do you need a W-2 or 1099? Given this shift, and the expansion of 1099 employment, many states and the IRS recognize the importance of having this information. They are requiring the information to be sent directly to the states in addition to the IRS. This creates additional complexity and exponential effort to complete all 1099 obligations.

What comes next? Will the ‘confusion’ die down?

The trend for more flexible work conditions will continue and is in fact evolving into an employment issue. Many companies today are evolving policies around where people work, where they can be hired, how many hours they work, debating expanded benefits and more. The focus is shifting to outcomes and not where workers work. This flexibility is the new currency in worker retentions and recruitment. As a traditional “job” becomes more flexible, offering some of the benefits of a freelance gig, more workers may seek the stability of a permanent position. The driving desire of workers for flexibility, purpose, etc. will continue to drive evolution in how people work.

One thing that may slow it down—and dramatically—is the proposed legislation to classify gig workers as employees. Basically, the proposed rules will give workers more access to company and government benefits but will also cripple many gig work business models and diminish options and flexibility in the market.