Personal liability in the gig economy

Working in the gig economy can mean freedom and a better income, but it also means personal liability if there's a misunderstanding or accident.

by Jane Haskins, Esq.
updated May 11, 2023 ·  4min read

While gig workers may have more personal freedom than people with traditional jobs, they also have a greater risk of being held personally liable if something goes wrong. A limited liability company (LLC) or corporation, together with a good insurance policy, can help protect you if someone files a lawsuit or claim.

Man in kitchen using tools to fix sink

The growing gig economy includes all sorts of workers who work as independent contractors rather than employees, from Uber drivers to freelancers on TaskRabbit or Upwork, to the handyman you found on Craigslist. About 36 percent of U.S. workers are now working in the gig economy, according to Gallup, either as a part-time side hustle or as their primary source of income. But many gig workers don't realize that they are, in fact, running a business, and potentially could be held liable if things don't go right.

Personal liability and the sole proprietor

When you start doing gig work, you automatically become a sole proprietor. As a sole proprietor, you are 100 percent responsible if something goes wrong in your business life. For example, suppose you're freelancing and you have a misunderstanding with a client about an assignment. Your client sues you, saying you didn't live up to your agreement and it's cost them tens of thousands of dollars. If the client wins, everything you own is potentially on the line, including all of your bank accounts, your car, and your house.

Protection from personal liability is one reason many gig workers set up LLCs and corporations.

In the eyes of the law, LLCs and corporations are separate from the people who own them. If your business is sued, you might lose everything you have invested in it but you won't lose your personal money or property. You should understand, however, that forming a business can't shield you from personal liability for your own negligence.

Benefits of corporation vs. LLC

You'll have the same level of personal liability protection with either a corporation or an LLC. Corporations and LLCs both can be set up with just one owner.

Many gig workers choose to form an LLC because LLCs lend themselves to an informal structure with simpler record-keeping, whereas corporations have a set structure of shareholders and officers and more formal meeting and record-keeping requirements.

Taxes and LLCs

LLCs are unique because the IRS doesn't have a specific tax classification for them. Instead, you can choose whether your single-member LLC will be taxed as a sole proprietorship, S corporation, or C corporation.

  • If you are taxed as a sole proprietor, you are self-employed and will pay your own Social Security and Medicare taxes (otherwise known as self-employment taxes) on your entire profits, up to federal limits. You'll report your profits on your personal tax return and will also pay federal and state income tax on them. (You can claim a deduction for half of the self-employment taxes you pay.)
  • If you are taxed as an S corporation, you are an employee of your company. You and your company will pay Social Security and Medicare taxes on your reasonable salary, but not on any additional profit the company makes. You'll report your salary and business profits on your personal tax return and pay taxes at your personal tax rate. Depending on your situation, S corporation taxation may save you money on self-employment taxes and allow you to take additional deductions.
  • C corporation taxation means your business profits will be taxed at the corporate tax rate. You will then pay personal income tax on the salary you take home, and taxes on any corporate dividends you pay to yourself.

Choosing the right tax classification can be complicated, and it is always best to get advice from an experienced small business accountant or attorney.

Getting the right insurance

Forming an LLC or corporation helps with liability protection, but your first line of defense should always be insurance:

  • Insurance can cover negligence, which isn't one of the protections offered by business formation. This includes things like forgetting an assignment, a customer who trips over a loose floorboard at your house, or a car accident that's your fault.
  • If you drive for Uber or Lyft, you're covered by their insurance. But all insurance has limits, and having your own car insurance liability policy will protect you if there's a catastrophic accident.

There are many types of business insurance, including liability insurance, auto insurance, and business interruption insurance. Consult with an insurance agent about the right type of coverage for what you do.

As a working member of the gig economy—whether you need to form an LLC or secure the right insurance protection—once you have your business structure and insurance in place, you can enjoy the potential freedom that gig work brings while protecting yourself and your income.

Find out more about what type of business is right for you. LEARN MORE
Jane Haskins, Esq.

About the Author

Jane Haskins, Esq.

Jane Haskins is a freelance writer who practiced law for 20 years. Jane has litigated a wide variety of business dispute… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.