September 21, 2021
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.
Are independent workers paying their estimated quarterly taxes? Do they even know they need to — and the penalty for not doing so?
In our recent report on "State of Taxes in the Independent Economy," we talked to 1000 independent workers who revealed their pain points around doing their own taxes, and their concerns around getting it right.
The Challenge of Quarterly Estimated Taxes
Being part of the independent economy, as a freelancer, gig worker, consultant, on-call worker, or other role, has its benefits, like more freedom and control over how you want to earn your income, more autonomy, and more opportunity.
But going independent means there are a lot of things independent workers have to do for themselves now, one of which is being responsible for getting their taxes paid. While employed W-2 workers have tax withholdings and payments done for them, independent workers are left to do their own calculations, set aside a portion for taxes, and make sure it gets paid.
The IRS asks that independent workers pay estimated quarterly taxes, or the amount of taxes they estimate they would need to owe on their income for that quarter, for both State and Federal. But how many independent workers know they need to do this, and how many more actually know how to do it? And how many are setting aside those funds — and not touching them — in order to pay their estimated taxes?
From our survey, we found that 42% of independent workers are not paying their estimated quarterly taxes. Are they trying to evade the IRS, or is there something else going on?
The biggest reason they're not paying quarterly estimated taxes is that they don't know the process. No one gets a handbook when they become an independent worker on how to do this, so everyone's required to research it themselves.
The second biggest reason they don't pay quarterly tax payments is because they opt to pay the penalty at the end of the year. It's a choice independent workers can take, if they know they'll have enough to pay the underpayment penalty.
The third reason they don't pay estimated taxes is that they're not even aware they should. Again, there's no handbook that's given out when someone becomes an independent worker, so they're tasked with figuring out what their responsibility is for their taxes for themselves.
The fourth reason they don't pay estimated taxes is that they don't have enough money set aside to do so.
W-2 employees get to have their taxes withheld from their paychecks, and while they may be unhappy about "all the money taken out," those are tax payments they don't have to calculate or worry about. When they receive any kind of income, independent workers have to take a percentage of it and either earmark it in their budget, or move it to a separate account, never to touch until tax time. This requires discipline and budgeting savvy that not everyone has. When we asked if they were indeed setting aside money off their income, 40% said they were not.
How can we fix this?
Businesses who work with and serve independent workers can help with this pain point by offering a way for workers to set aside money for tax payments at their point of payout. That way they’re not wholly responsible for calculations and withholdings, and won't be tempted to touch an account that's holding money to be paid each quarter.
In fact, many businesses are already providing this service, and finding that it's a value add for their users, which increases conversions and retention. It also creates a new revenue stream for them as well.
Businesses are well-positioned to solve a pain point that will help grow the independent economy, and help independent workers better navigate the waters of quarterly estimated tax payments.