Freelancing, Side Hustles and Gigs: What We Learned About the “New Economy”
Every month, there are at least 2.5 million people servicing and selling on gig economy platforms such as Lyft, Uber, Etsy, AirBnB, TaskRabbit and more. The overwhelming majority of people working with these platforms earn less than $500 a month. These are usually “side jobs”, where people work 10-12 hours a week to supplement other forms of income. At the Prosperity Summit, we explored what was happening financially for these workers and all types of contractors, and particularly how issues of financial security, such as tax obligations and retirement savings, are being affected.
For many, these platforms, they represent a relatively low-cost barrier to entry for starting a business and provide a great deal of flexibility for when and where you work. These platforms also help connect sellers with customers and processes payments electronically. People working on these platforms can deduct business expenses from their tax obligations, and still use the income to count towards the Earned Income Tax Credit or other child tax credits. However, we also learned that when it comes to tax-time, there are a number of hurdles these workers are facing.
Because workers on the gig platforms are “self-employed”, they must keep detailed records. However, as Caroline Bruckner shared from a 2016 survey with the National Association of Self-Employed:
- 1/3 did not know whether they were required to make quarterly payments on the income they earned from servicing their platform, nor did they understand the record keeping requirements.
- 43% didn’t set aside any money for taxes and didn’t know they would have to pay taxes.
- Almost half didn’t know about any tax deductions or credits to offset their tax liability.
- Crucially, more than 60% working for these platforms in the gig economy did not get a 1099 form. This means the IRS did not know about their income earned from freelance work.
The implications for wealth-building are critical. Without 1099 reporting and without withholding, there is a 63% increased likelihood of misreporting income to the IRS. This increases the risks of tax penalties and audit exposure. Moreover, these workers are not getting credited for Social Security purposes and will earn less in retirement as a result.
Members of our Taxpayer Opportunity Network were especially interested to understand how VITA tax preparation sites can help rideshare drivers such as those working with Uber and Lyft. Barbara DelBene provided detailed information on how VITA preparers can connect drivers to important documentation and understand the full extent of their expenses and net income. She posted numerous resources for tax preparers to learn more about how to prepare these returns.
There was also robust discussion of ways local governments and nonprofits can better support workers in the gig economy. Lorelei Salas, Commissioner of New York City’s Department of Consumer Affairs, shared the work her department has done to ensure New York’s freelancers are getting paid what they are owed, and on time. She also stressed, however, that outreach and support for these drivers need to be tailored and delivered among diverse communities to better reach more vulnerable, lower-income contractors.