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September 13, 2021

1099 Workers Worry About Being Audited and Owing More in Taxes

This post is part of an on-going series that explores in-depth the state of taxes in the independent economy. To read the full report based on our survey of over 1000 1099 workers, click here.


Getting audited has always been a fear of taxpayers. Even those who know they've done it correctly still always have that "What if…?" in the back of their minds come April 15.

But the fear of being audited is especially high for workers in the independent economy. 68 million independent workers don't have the benefit of having an employer take taxes out of their paychecks for them, and then simply enter what's in the W-2's boxes at tax time.

Independent workers need to calculate what they anticipate owing, and set aside that amount from each paid invoice, ecommerce sale, or app payout. That amount that's set aside needs to go untouched, and should be paid quarterly into both Federal and State. Then, when independent workers file taxes each April, they'll find out if they set aside enough the previous year, or they’ll have to pay a penalty. Additionally, they need to figure out their own deductions based on kept receipts or tracking, and hope they did it all correctly. It seems that with so many calculations relying on their own records, anything could trigger an audit.

No wonder there’s fear around tax time.

As we discovered in our "State of Taxes in the Independent Economy" report, fear of audit is high, and stems from not having the guidance and structure in place to fully understand how to pay taxes as an independent worker.


Audit Fears of Independent Workers

We found that 51% of independent workers we surveyed fear being audited — which would translate into 35 million of the 68 million independent workers today.

Additionally, 37% are very concerned that they'll end up owing more than they filed for, with 31% somewhat concerned.



Why are they concerned? The process is confusing, say 44% of respondents. Other concerns are not having budgeted correctly, and not sure if they have the right documents.



The process is confusing because the process wasn't made for independent workers with 1099 income. The process was made for employed workers, where money is taken out each paycheck, and workers don't need to think twice about it, much less do any calculations, much less submit it all themselves.

Because there's so much infrastructure around it, the process of navigating W-2 taxes may feel safer and more immune to audit than 1099 tax situations. Independent workers may also feel that the IRS is just looking for them to make a mistake, which may be a lot easier to do when there's no guidance around it.


Easing Audit Fears for Independent Workers

How can we create more infrastructure, remove the pain points, and get independent workers fearing less about the IRS knocking on their door?

The answer is relatively simple: Businesses that work with and serve independent workers — like freelance platforms, gig work apps, or banking apps — can offer tax deductions at the point of payout.

This simple fix is already being used by businesses who serve the independent economy. It not only eases the burden and worry of doing taxes as an independent worker, but can be an incredible value add as well, retaining great talent and drawing new users in.

It's a unique problem to fix, but businesses are primed to step in and fix it, not only to ease the fears of everyday workers, but also to be part of growing the future of the independent economy.


Authors

Trent Bigelow
CEO, Abound
Daniel Hayes
Product

Ready to build the future independent workers want to work in?