Kristen BermanContributor
Kristen Berman is the co-founder and CEO of Irrational Labs, a behavioral research and design consultancy.
More posts by this contributor
- Reducing the spread of misinformation on social media: What would a do-over look like?
- Payday startups are increasing access to wages, but is “make any day payday” the right choice?
Bradley Swain is a behavioral researcher at the Common Cents Lab, where he uses behavioral economics to help low and middle income families make better financial decisions. Bradley received his Master’s Degree from the University of Miami’s Abess Center for Ecosystems Science and Policy in 2016.
The rise of thegigeconomywas facilitated by technology that helped people run their own businesses. There are now dozens of apps and services that empower people to sell goods, sell space in their home and sell their trade skills.
But this application of technology has been uneven. While it has helped companies build marketplaces and consumers buy these goods and services, it has often times ignored the needs of these newly minted self-employed business owners — the 1099 workers.
This first generation of 54 milliongigeconomycontractors is essentially riding shotgun as an entirely new industry defines itself. While they enjoy flexibility and a convenient way to supplement a primary income, they also must act as guinea pigs uncovering the shortcomings of the industry’s support network. One issue in particular has become a clear gap forgigeconomyworkers: taxes.
Tax withholding: The benefit 1099 workers aren’t getting
Taxes are a growing gap betweengigeconomyworkers and traditional employees. W-2 workers are automatically part of the government withholding program that automates theirtaxsavings so they are not left owing sizable annual sums. Many 1099ers want this option too. In a 2016 survey, 47 percent of 1099 workers said they want a way to save a little money from every paycheck for taxes.
With no such program available to them today, we tested ideas in partnership with 1099 payments company Payable to figure out what type oftaxsavings program might work best for gig economy workers. Our initial survey of more than 1,000 gigeconomyworkers found that while nearly all contractors wanted an easy way to save for taxes, they had concerns about access to and control over their funds.
Seeking more information about this tension, we conducted follow-up enrollment testing that showed — to everyone’s surprise — that 1099 workers were 25 percent more likely to opt for a wallet that promoted automation versus one that promoted features around control and accessibility. This Say/Do dilemma makes sense. While it would be nice to have agency over your money, taxes are a necessity and something that’s easier to automate and forget.
How cangigeconomybusinesses and technology providers better support thetaxneeds of 1099 workers?
Use a payroll system that offers 1099 workers the option of payment into two different accounts. Many W-2 workers can elect to have their paycheck automatically deposited in a savings account and a checking account. By offering this same capability to 1099 workers who need to set aside 30 percent of their income for taxes, companies can demonstrate their support for drivers and differentiate themselves within the marketplace.
In a 2016 study of Payable users, only 16 percent knew they needed to pay quarterly taxes — however, 100 percent of contractors making more than $1,000 a year actually do need to pay quarterly taxes. Neweconomycompanies can help workers better understand their obligations by offering reminders or even suggested savings estimates based on income, an easy way to earn loyalty and differentiate from the competition.
1099 workers can limit theirtaxbill at the end of the year by treating themselves like a business and writing off their expenses. Stride Health and Intuit have released solutions specifically for the self-employed that can dramatically reduce ataxbill by recording expenses throughout the year. While this is an additional burden that 1099 workers must carry, it is also one that could offset thetaxliability that puts many in a tough spot come April.
Employers, payroll providers and third-party solutions all have the ability to makes small changes that could help the 54 milliongigeconomycontractors deal with the shortcomings of the current industry and create a bridge into the future world of work. In this transition to the future of work, policy also must support worker rights — from improving ease of reporting taxes to the actual filing requirements.
We have sent amanto the moon, satellites are mapping the entire earth and machines are imaging our brains… the very least we should be able to do is provide these new gig economy workers with a way to withhold some taxes.
FAQs
Your gig income is also subject to self-employment tax, which includes Social Security and Medicare taxes. While traditional Form W-2 employees have these taxes automatically withheld from their paychecks, in the gig economy, the onus of tax withholding falls squarely on your shoulders.
Why do gig economy workers need to pay estimated quarterly taxes? ›
Gig workers are considered self-employed by the IRS. This means they are responsible for paying both income taxes and self-employment taxes (Social Security and Medicare). Unlike traditional employees, gig workers don't have taxes withheld from their income, requiring them to make estimated tax payments quarterly.
What is the tax credit for gigworkers? ›
You may be eligible for up to $32,220 in tax credits from 2020 & 2021.
What is one downside of working in the gig economy? ›
On the whole, however, gig workers tend to have far fewer employment rights and benefits than full-time staff, which often includes no sick pay, holiday allowances or company pensions. Tax obligations: Like all self-employed people, gig workers have to track and pay their own taxes.
Do gigs count as income? ›
All income from gig-related goods and services is taxable, whether you get a tax form from the platform or business.
What is a gig worker and how do taxes affect them? ›
Many “gigs” involve providing a service. You may be a driver for a ride-hailing service, deliver groceries, perform household tasks, or provide consulting services. When there is no tangible personal property transferred in a transaction, there is no “sale” under the California Sales and Use Tax Law.
Does the IRS audit gig workers? ›
And small businesses have extra tax rules – and potentially more IRS audits and notices. This is true whether your gig economy job is your primary source of income or your side hustle. It's important to know that filing taxes as an independent contractor can get complicated.
Can gig workers write off expenses? ›
As a freelancer or gig worker, you likely have some startup costs, such as filing fees for permits or business licenses. You can immediately deduct up to $5,000 each in business startup and organizational costs if you spend less than $50,000 total.
Do I have to pay taxes on a side hustle? ›
As a side hustler, you're considered to be self-employed in the eyes of the IRS. That means you will need to report and pay taxes on this income stream along with any other income sources.
How do gig workers pay taxes? ›
If you do gig work as an employee, your employer should withhold tax from your paycheck. If you do gig work as an independent contractor, you may have to pay estimated taxes. Unsure if you are an employee or independent contractor? Ask your employer or check your worker status.
As discussed earlier, traditional proof of income documents like pay stubs and tax returns may not be sufficient for gig workers. Alternative documents like bank statements, invoices, and profit and loss statements can be used to show your income.
What is the $3,600 dollar tax credit? ›
How has the Child Tax Credit changed over the years? The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 per child for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17.
What is the difference between gig economy and gig workers? ›
A gig economy is a labor market that relies heavily on temporary and part-time positions filled by independent contractors and freelancers rather than full-time permanent employees. Gig workers gain flexibility and independence but little or no job security.
What are two drawbacks to gig work? ›
The cons are no doubt some of the reasons many might shy away.
- No Benefits. For the majority of gig economy work, there are no benefits since the gig worker is not a full-time employee. ...
- Loneliness. ...
- More Stress.
2.3 The gig economy and happiness. The literature on happiness at work suggests that self-employed workers are happier than salaried ones (Andersson, 2008; Warr, 2018), especially if they are self-employed out of choice rather than necessity (Binder & Coad, 2016).
Do gig workers get audited by IRS? ›
And small businesses have extra tax rules – and potentially more IRS audits and notices. This is true whether your gig economy job is your primary source of income or your side hustle. It's important to know that filing taxes as an independent contractor can get complicated.
Do I have to report Uber income under $600? ›
Who must file taxes? If you earn more than $400 from Uber or Lyft, you must file a tax return and report your driving earnings to the IRS. Most Uber and Lyft drivers report income as sole proprietors, which allows you to report business income on your personal tax return.
Do gig workers count as employed? ›
Gig workers classified as 1099 are considered independent contractors. They are not employees of the company or individual hiring them but rather operate as self-employed individuals. Independent contractors are responsible for their own taxes, including income and self-employment taxes.
