Kristen Berman is a co-founder of Duke’s with Professor Dan Ariely. Common Cents is generously supported by MetLife Foundation. Kristen was on the founding team of Google’s behavioral economics team, and was previously the founder of Irrational Labs, a behavioral economics nonprofit focused on health and happiness.
More posts by this contributor:Bradley SwainContributor
Bradley Swain is a behavioral researcher at the , 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 the gig economy was 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 million gig economy contractors 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 for gig economy workers: taxes.
Tax withholding: The benefit 1099 workers aren’t getting
Taxes are a growing gap between gig economy workers and traditional employees. W-2 workers are automatically part of the government withholding program that automates their tax savings 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 of tax savings program might work best for gig economy workers. Our initial survey of more than 1,000 gig economy workers 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 can gig economy businesses and technology providers better support the tax needs 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. New economy companies 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 their tax bill 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 a tax bill by recording expenses throughout the year. While this is an additional burden that 1099 workers must carry, it is also one that could offset the tax liability 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 million gig economy contractors 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 a man to 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.
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