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May 17, 2021

State of Taxes in the Independent Economy

The days of the career 9-to-5ers are dwindling.

More workers are moving into the independent economy, and the COVID-19 pandemic only sped up that shift, as laid-off workers sought new ways to make income, as many needed to supplement lost income with gig work, or as many discovered they wanted to pursue a passion that let them be untethered from a physical workplace.

Whatever the reason, and whatever path independent workers choose, the 68 million independent workers in the US today all face the same dilemma: Filing their taxes as 1099 workers, and no longer as W-2 workers. Unlike W-2 employees, independent workers don’t have the luxury of taxes being withheld from their paycheck, and must calculate their owed taxes and make sure they’ve saved enough every month to cover that obligation.

This means that for those who are confused about the process, didn’t pay their quarterly estimated taxes last year, or haven’t been saving enough, the tax deadline might hit them hard with a new financial reality.

The tax deadline is here. Are independent workers ready? We wanted to find out.

Methodology

On May 3, 2021, we surveyed 1,003 Americans who earn the majority of their income as independent workers (receiving 1099s instead of W-2s) to find out more about their experiences with tracking their finances and paying their taxes.

Key Findings

Here’s what we found when we learned more about independent workers and how they approach their taxes:

40% aren’t setting aside income every month for their taxes. Independent workers are responsible for calculating and paying the taxes they owe, as taxes are not withheld from their paychecks — but almost half aren’t setting aside the funds to do so. 

42% say they don’t pay their quarterly estimated tax payments. Independent workers should pay quarterly taxes in order to cover what they owe and avoid penalty. But many are not doing so because they’re unaware they should, don’t know the process, want to wait and file yearly, or just don’t have enough set aside to pay it.

51% of independent workers worry about an IRS audit. Because the process of calculating and filing taxes is different for 1099 workers than it is for W-2 workers, they fear getting audited — possibly because they made a mistake, didn’t have the right documents, or missed something else.

18% haven’t started their 2020 tax filing — and don’t expect to have it done by the deadline. Despite the deadline being pushed back to May 17, 18% of our respondents don’t expect to meet the deadline. That translates into over 12 million independent workers failing to file on time.

33% won’t be able to pay their taxes. One-third of respondents don’t believe they’ll be able to meet their tax obligations this year.

69% are concerned they’ll owe more than they thought. They’re worried that they made a calculation mistake somewhere that will result in them having to pay more than they anticipated or filed for.

Part 1: Profile of Who We Surveyed

For this report, we surveyed 1,003 individuals in the US who earn the majority of their income from independent work, whether that be through freelance work, gig work, on-call work, or anything else considered to be 1099 income. 

Of those we surveyed, the majority (29.8%) fell between the ages of 35 and 44, with the next largest segment (25.7%) between the ages of 25 and 34. 15.9% were 24 or younger, and 28.7% were age 45 or older. 58% identify as male, and 42% identify as female.

The majority are gig workers and independent consultants/freelancers

What is an independent worker? While what they do have in common is not working for an employer under a W-2, what they don’t have in common is one title or categorization.

The majority of our respondents (23%) are gig workers who work in the rideshare industry, make deliveries, or do other one-off work. The next largest group (21.4%) are independent consultants, professionals, or freelancers. 16.9% are merchants or sellers who either own a shop, sell online, or both. 14% are on-call workers like substitute teachers and healthcare workers. 13.5% are content creators like podcasters, musicians, or streamers. Since there’s such a variety of independent workers, 11.2% replied “Other.”

Some are new independent workers, and some have been for a while

The COVID-19 pandemic created the tipping point for many deciding to go into — or having to go into — independent work. How long have our respondents been independent? As it turns out, there’s a mix.

The majority of our respondents (22.3%) have been independent workers for one to three years — which would certainly place many at the beginning of the pandemic, if they lost income immediately and needed to fill in their earnings. Yet almost as many (21.5%) have been independent workers for over five years, and 20.2% have been doing it for three to five years. This means that our respondents skew towards being more experienced.

18.8% have been working independently for six to eleven months, and 17% have been at it for less than six months — meaning both groups moved to independent work during the pandemic.

54% made over $50,000 from independent work in 2020

Given that our respondents make the majority of their income from 1099 work or other non-W-2 work, we wanted to know how much they made in 2020. We found that there was a variety of income: 22.5% made less than $24,999; 23% made between $25,000 and $49,999; 19% made between $50,000 and $74,999; 16.6% made between $75,000 and $99,999; and 18.8% made over $100,000.

Broken down, 45.5% made $49,999 or less, and 54.4% made $50,000 or more.

Those supplementing with 1099 work do it for immediate needs and savings

For those who are supplementing W-2 income with independent work, what’s the biggest motivation? The two biggest reasons are to meet immediate needs like housing, food, or health coverage (28.9%) and doing it to build up savings (28.7%). 

Other reasons our respondents took on supplemental independent work included the need to cover an emergency expense (16.7%), or doing something to fill the time (13%). 12.8% do it for another reason altogether.

Those whose primary income is 1099 do it for the flexibility and control

What is the main motivation for those who have made independent work their primary source of income? The majority (32.6%) of respondents report that their biggest motivation is more flexibility and control over how, when, and where they earn their living. 28.5% are doing it because they’re between jobs, and turned to independent work to fill the gap. 22% find that they’re better paid as an independent worker than elsewhere. 16.8% do it for other reasons.

Section Summary:

What we found here is that there is no one particular type of independent worker. Some drive Ubers and some substitute teach and some run podcasts and some are freelance designers. Some are supplementing traditional W-2 income because they need extra cash for immediate needs, and some are doing it to build up their savings. Those who are independent fulltime love the freedom and control it gives them over how they earn their income and how they manage their careers, and some are doing it because they found it just pays better.

But despite all the different kinds of independent workers, they all have one thing in common as 1099s: They don’t have taxes taken out of their paychecks, and have to figure that out themselves. In our next section we’ll find out how they’re doing with that reality.

Part 2: Experience Dealing With Taxes

Those working for traditional employers receiving W-2 don’t have to do the math on their tax withholdings — it just comes out of each paycheck, which makes filing taxes every April pretty streamlined. But independent workers don’t have that luxury, which means that they need to anticipate how much in taxes they’ll pay, keep track of their deductions, pay into their estimated quarterly tax payments to both the IRS and their state, and more. We wanted to know their experiences with paying their taxes as independent workers, and if they’ve figured it out or if the process is still daunting.

63% have filed as independent workers before, while 37% have not

With the tax deadline approaching, and knowing that filing taxes has some differences for independent workers, we wanted to know if our respondents had ever filed taxes specifically for their 1099 income before this year. 63.1% had (which is no surprise, considering that many of our respondents have been independent workers for a few years). 36.9% have not yet filed taxes as an independent worker.

For experienced independent workers, their biggest tax fears were being unsure of the process

Those who have filed their taxes before as an independent worker found that their biggest challenges in the past were:

  • Being unsure of the tax process for freelancers (23.4%)
  • Worried about being penalized for not paying quarterly estimated taxes correctly (22.1%)
  • Unsure if they paid their quarterly estimated taxes correctly in the first place (16.9%)
  • Not knowing what qualifies as a deduction (16.8%)
  • Not having kept track of deductions (12.3%)
  • Not having kept track of earnings (8.5%)

In other words, the majority of concerns centered around getting the process right, and making sure they paid their quarterly estimated taxes correctly.

For those filing for the first time, they worry about not having kept track of deductions

For those who haven’t paid taxes as an independent worker before, their biggest concerns right now are:

  • Not having kept track of deductions (21.4%)
  • Not knowing what qualifies as a deduction (17.6%)
  • Unsure of the tax process for freelancers (16.7%)
  • Worried about the penalty for not paying estimated taxes correctly (16.7%)
  • Not having kept track of earnings (14.1%)
  • Unsure if they paid estimated taxes correctly (13.4%)

For those currently approaching their taxes for the first time, they’re less concerned about the process and quarterly tax payments (because, at this point, it’s too late to worry about that), and most concerned about deductions: did they keep track of them, what would qualify as one, and how to go about properly deducting them.


They either file themselves (26%) or file with an online tool (24%)

We all have our preferred way of filing taxes, so how do our respondents typically file theirs? They’re nearly split on filing manually themselves (25.7%) and filing online with a tool like TurboTax or H&R Block (24.4%). 19.9% hire someone to do their taxes, and 15.6% have a family member or friend do them. 14.4% surprisingly reported that they don’t file taxes at all.

More independent workers have switched to hiring someone for their taxes

As they moved to independent work and the process for filing taxes shifted, we wanted to know if our respondents had changed the way they did their taxes. They were nearly evenly split in their responses: 34.3% have not changed their method, 37.6% have gone from doing it themselves to hiring someone, and 28.1% have gone from hiring someone to doing it themselves.


40% don’t set aside part of their income every month for their taxes

One of the biggest differences for independent workers is that federal and state taxes are not automatically withheld from their paycheck like it is with a W-2, so independent workers need to calculate what that amount should be and set it aside in order to ensure they’re paying the right amount of taxes. But are independent workers actually setting aside that money? 59.7% replied that they do set aside income every month for taxes, but 40.3% do not.


42% don’t pay their quarterly estimated tax payments

Additionally, independent workers should be filing quarterly estimated taxes with both the IRS and their state, in order to cover the taxes owed on their income for that quarter (it’s not a necessity, but they face penalty for underpayment if they don’t). Are our respondents paying estimated quarterly taxes? 57.8% are paying quarterly taxes, yet 42.2% are not.

They don’t pay because they don’t know the process

For those who don’t pay their estimated quarterly taxes, we wanted to know why — and responses were nearly even:

  • I don’t know the process (27.2%): Over a quarter of our respondents aren’t clear on the process for paying their estimated quarterly taxes.
  • I just wait until I file yearly and pay the penalty (26.5%): About a quarter simply wait until their yearly taxes are due, file once, and pay the penalty.
  • I’m unaware that I should (26%): About a quarter aren’t aware that they should be paying estimated quarterly taxes at all.
  • I don’t have enough set aside (20.3%): Less than a quarter don’t have enough set aside to actively pay quarterly taxes.

51% of independent workers worry about being audited

Because the process for filing as an independent worker is less straightforward than for W-2 workers, we wanted to know if our respondents feared being audited. Half (50.9%) do fear being audited, while half (49.1%) do not.

Section Summary:

A few key observations become clear here when it comes to independent workers and taxes.

First, there’s still confusion over how the process of filing taxes should go for independent workers. Our respondents report not paying quarterly estimated tax payments because they’re unsure of the process. Those who have filed in the past say that when they first did so, they were concerned over the process. We’ll also see in the next section that many are afraid they’ll owe more than they thought because they think the process is confusing. This signals that there’s a lack of education, guidance, and support out there for independent workers on how to do this — which is a huge gap that needs to be filled as more and more individuals go independent.

The second observation is that many independent workers aren’t setting aside income each month to pay their quarterly estimated tax payments, or to anticipate what they’ll owe when they file their yearly taxes. This could be due to not having enough at the end of the month to save, but could also be a lack of how to budget for it, not using separate accounts to keep track of it, or other logistics issues.

In our next section, we’ll see how well our respondents are prepared for this year’s tax deadline.


Part 3: Current Status of Tax Filings 

With the extended tax deadline approaching on May 17, 2021, our independent workers are right in the midst of filing, and for those who shifted to independent work during the pandemic, this might be the first year they’re filing as a 1099 worker. Do they feel confident? Are they feeling fearful? Here’s what we found out.

18% haven’t started their 2020 taxes and don’t expect to have it done by the deadline

With the deadline quickly approaching, we asked what their filing status is. As of May 3, 2021, the date of our survey, 43.2% have completed their taxes and filed. 21.2% report that they’re still working on it, but are on track for a May 17 deadline. 17.6% report not having started their taxes yet, but are confident they’ll finish by May 17. But 17.9% haven’t started yet and believe they won’t have their taxes ready by the deadline. If there are 68 million independent workers, this would translate into over 12 million workers not being prepared — even with the deadline extension.

33% don’t have the funds available to meet their tax obligations

For those paying taxes this year, do they anticipate having enough money to do so? 67.5% believe that they will. But 32.5% don’t think they’ll have enough funds to meet their tax obligations. This could be because many workers aren’t setting aside enough or didn’t pay into their quarterly taxes, or they realized they didn’t calculate their owed taxes correctly.


69% are concerned they will owe more than they filed for

Because it’s up to independent workers to estimate how much taxes they’ll owe at the end of the year, both to the IRS and their state government, they need to not only estimate correctly but should set aside that amount as they go. Are our respondents concerned that they didn’t get it right? 37.7% are very concerned that they’ll end up owing more than they filed, and 30.9% are somewhat concerned — which means that 68.6% have some kind of concern they’ll owe more. 31.4% don’t have concerns that they’ll end up owing more.


Nearly half are concerned because the process is confusing and they’re afraid they made a mistake

For those who are concerned about having to overpay, we wanted to know why. The majority (43.8%) reported being worried because the process for filing as an independent worker is confusing, and they’re afraid they made a mistake. 20.2% report being concerned about budgeting correctly. 17.9% weren’t sure they had the right documents. Finally, 18.2% replied that they were concerned for other reasons.

Section Summary:

When it comes to filing taxes for 2020, nearly half of our respondents are done, and many are on track to finish. But many haven’t even started, and are anticipating not being able to file by the deadline. This could certainly be due to poor planning, but it may be due to confusion around the process, and hesitation over how to proceed. Concern over the process surfaced again, in that nearly 40% believe they’ll end up owing more because they made a mistake or didn’t budget correctly, which again shows the lack of tools and support independent workers have for this incredibly important task. Additionally, one-third of respondents don’t believe they’ll have enough to pay their tax obligations.

Overall, the story is that many independent workers have figured out the process, and are confident in their tracking. But there are still many for whom this process is confusing and unclear, causing worry and stress where there shouldn’t be.

Conclusion:

There are 68 million independent workers, and that number is only going to increase. Not only does independent work give individuals a chance to take control of their career and seek out work they want to do and when they want to do it, but it also gives options for those looking to make some quick money on the side to easily do so. 

But choosing to be an independent worker shouldn’t be penalized by an opaque, confusing, and hard-to-navigate system of being left to figure out taxes on their own, with little guidance — and the threat of audit or penalty hanging over their heads if they get the slightest calculation wrong.

What’s clear is that independent workers need tools and support to be able to navigate the world of work they choose to be a part of, and so that stepping into the independent economy won’t be a step backwards.


A Note From Abound

“Today, the relationship between workers and those who hire them is rapidly changing. ‍ The old ways of work relied on the expectation that both workers and employers were in a committed career-long mutual relationship.

For a range of reasons, both workers and employers seek more flexibility and are increasingly favoring non-employee arrangements.

However, this new way of work leaves independent workers without the safety net of benefits and withholdings that the employer normally provides to their employees.

Providing workers with access to--and the ability to contribute to-- benefits isn’t just the right thing to do, it’s a brand new business opportunity for increasing retention, revenue, and compliance.

This is about building the future that independent workers want to work in.”

— Trent Bigelow, CEO and Cofounder, Abound

Get in touch:

partner@withabound.com

Authors

Trent Bigelow
CEO, Abound
Daniel Hayes
Product

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