The rise of gig economy platforms such as Uber and Amazon Flex have made it increasingly easy to earn flexible 1099 contracting income. Today, nearly a third of working Americans do so. Among this group of newly minted self-employed, there is widespread misunderstanding of tax laws resulting in significant overpayment to the IRS.
The most commonly missed tax deductions
Keeper, an automatic freelancer expense tracker, estimates the average US gig worker overpays on taxes by 21%. Put in perspective, that’s an overpayment of around $400 for the average part-time gig worker, and about $1,550 for gig workers making $25,000 per year.
The first analysis is done by segmenting average tax overpayment amounts by gig work type. Note that the sample includes both full-time and part-time workers. In the study, we found that blue-collar gig workers were the most likely to overpay the most. The included TaskRabbits, movers, Handy workers, and other blue-collar gig work.
Separately, the study also included an analysis of the most commonly missed deductions across all 205 participants for their 1099 contractor taxes, and the average resulting overpayment from missing the deduction.
The study uses publicly available tax data from the IRS, alongside a retroactive analysis of 2018 tax returns.
The first data set used is Sole Proprietorship Statistics published by the IRS. This data set provides aggregate income, and deductions data, across various contractor segments in the US. It’s for 2016 tax returns, which is the latest data set available publicly. The gig worker type groupings outlined in the findings are mapped using the nearest IRS job type categorization.
The second set of data comes from a study conducted by accounting software company Keeper. This study involved reviewing 205 gig worker tax returns from 2018 and identifying missed tax write-offs. Study subjects were required to have earned at least $600 from 1099 independent contractor jobs in 2018 and were compensated $30 for participation. Advertisements for the study were placed across craigslist postings in 16 major US cities.
There are several key assumptions and generalizations made in the study, and they are listed below.
The study’s sample of 205 gig workers is not a trust random sample as there is selection bias in who chose to be part of the study. However, there was a monetary incentive that reduces volunteer bias, and users were not pre-screened outside of having at least $600 in gig work income during 2018.
Tax payment estimates assume a 30% effective tax rate
This is an industry-standard generalization of 15% federal income tax, 7% social security and medicaid tax, and an additional 7% state income tax. This is not an attempt to be rigorously accurate since not every state has an income tax, and different income brackets will correspond to slightly different tax rates.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. That sometimes leads us to generalize in our educational content. Please email email@example.com if you have questions.