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
You must file a tax return if you have net earnings from self-employment of $400 or more from gig work, even if it's a side job, part-time or temporary. You must pay tax on income you earn from gig work. If you do gig work as an employee, your employer should withhold tax from your paycheck.
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.
What is a negative of gig economy? ›
However, the downside to working for an employer that pays in gig hours is poor compensation. The need to increase income can be a huge motivator for gigs – especially if you are living a frugal lifestyle. The majority of Gig Economy jobs don't offer full-time payment.
Do gig workers have to pay Social Security tax? ›
Gig work is taxable
Gig workers may be required to make quarterly estimated tax payments. If gig workers are self-employed, they must pay all Social Security and Medicare taxes on their income from the gig activity.
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.
Are gig workers counted as employed? ›
TL;DR: The IRS classifies gig workers the same as independent contractors, but in practice freelancers who use online platforms to find gig work tend to have less complex business structures and less control over the contractual terms of their work. Also, state laws vary.
What happens if I don't report my side hustle income? ›
Those 1099 forms are also submitted to the IRS. So if you ignore one and don't report the income, the IRS will generally flag your tax return. And if the IRS receives multiple 1099s that you don't report, the agency might get suspicious.
Do I pay taxes if I make less than $20,000? ›
So as long as you earned income, there is no minimum to file taxes in California. It is a good idea to talk with a tax professional to determine your filing status and whether you are required to file or could benefit from doing so anyway.
How much money can a small business make before paying taxes? ›
You must file a return if you earn $400 or more in net earnings from your business. Net earnings equal taxable business income minus allowable business deductions.
What is the dark side of the gig economy? ›
One of the biggest issues with the gig economy is the classification of workers as independent contractors rather than employees. This legal loophole allows companies to sidestep labor laws, avoiding responsibilities like providing health benefits or a minimum wage.
The gig economy can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and the demand for flexible lifestyles. Drawbacks include having no paid holiday or sick leave, fluctuating wages, stress, and loneliness.
Is gig economy ethical or not? ›
Though the gig economy created large labour markets and help economic growth, it turns out to be unethical for workers, organizations, and society. This paper aims to argue the unethical facts by sorting out relevant literature and analyzing some cases.
How do you pay taxes as a gig worker? ›
Schedule C, Profit or Loss From Business (Form 1040 or 1040-SR): This form is your platform to report gig income or loss and claim business expenses. Appropriately managing these business expenses can reduce your taxable income and decrease your overall tax liability.
At what age is Social Security no longer taxed? ›
This meant that as benefits rose, more recipients crossed over the thresholds. Now 56 percent of beneficiaries pay income tax on a portion of their benefits, sometimes as much as 85% if their total income exceeds upper thresholds. There is no age at which you will no longer be taxed on Social Security payments.
How does the IRS know if you have a side hustle? ›
Whether someone is having fun with a hobby or running a business, if they are paid through payment apps for goods and services during the year, they may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal tax returns.
How do you file taxes if you get paid under the table? ›
Is It Necessary to Report Income From Under the Table Jobs? The short answer is yes. Depending on the source of your under-the-table income, you will be required to file Form 1040. You may also need to file Form 4137 for reporting cash income from odd jobs, such as tips.
Do I have to pay taxes on hobby income? ›
Is hobby income taxable? The IRS requires you to report all your income; hobby income is no exception. You pay taxes on your income whether you profit from a hobby or a business. However, one key difference is that taxpayers with hobby income (not considered business income) can avoid self-employment taxes.
Can gig workers claim mileage on taxes? ›
If you use your car for personal use and your gig driving, you must establish what percentage of use is for gig work and apply that portion of the expenses as a delivery or rideshare tax write-off. Using the standard mileage rate, you record your total miles as part of your gig-driving job and write it off.
