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Gig workers overpay on taxes by 21%

Most-missed deductions include phone bills and software subscriptions

by
Paul Koullick
Updated 
April 12, 2019
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Reviewed by
Justin W. Jones, EA, JD
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Gig workers overpay on taxes by 21%

Most-missed deductions include phone bills and software subscriptions

by
Paul Koullick
Updated 
August 17, 2023
Icon check
Reviewed by
Justin W. Jones, EA, JD

The rise of freelance work marketplace economy platforms such as Doordash and Patreon has made it increasingly easy to earn flexible 1099 contracting income on the side. 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. 

Summary

By analyzing the 2018 tax returns of 205 gig workers, the study found an average tax overpayment of 21%. Put in perspective, a side hustler earning three thousand dollars overpays by about $200 annually, and someone with independent contracting income of $25,000 per year overpays by an average of $1,550 every year. 

Additional cuts on the data, including overpayment by industry and which types of deductions were most commonly missed, below.

Methodology

The study analyzes 2018 tax returns of 205 participants, alongside publicly available tax data from the IRS.

Study subjects were required to have earned at least $600 from 1099 contracting work in 2018 and were compensated $30 for participation. Advertisements for the study were placed across craigslist postings in 16 major US cities. 

The second 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 publically. The gig worker type groupings outlined in the findings are mapped using the nearest IRS job type categorization.

Key assumptions and generalizations made in the study include the below:

  1. Representative sampling. 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. Subjects were not told what the study was about, to reduce selection bias. 
  2. A flat 30% effective tax rate on 1099 income was assumed. This is an industry-standard generalization of 15% federal income tax, 7.5% social security and medicaid tax, and an additional 7.5% 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.

Raw findings

Type of freelance worker # tax returns Avg. AGI Avg. business expense deductions claimed Avg. effective tax rate Avg. tax overpayment
Rideshare and delivery drivers Nation-wide 1,256,274 $23,041 $17,357 7.40% 22%
Reviewed by study 87 $21,284 $17,169 5.80%
Online sellers Nation-wide 302,491 $31,034 $24,765 6.10% 14%
Reviewed by study 34 $28,810 $23,816 5.20%
Freelance knowledge workers Nation-wide 153,118 $28,798 $18,294 10.90% 22%
Reviewed by study 26 $19,129 $13,709 8.50%
Online tutors National average 128,012 $20,376 $10,969 13.90% 19%
Reviewed by study 27 $25,152 $15,762 11.20%
Blue-collar gig workers National average 625,769 $16,883 $7,421 16.80% 25%
Reviewed by study 31 $16,221 $9,408 12.60%

Breaking it down more simply, here is an estimate of money overpaid on taxes by the average gig worker:

Industry Avg. AGI Avg. tax payment Avg. amount overpaid on taxes
Rideshare & delivery driving $23,041 $1,705 $443
Online selling $31,034 $1,893 $246
Freelance marketplaces $28,798 $3,139 $471
Blue-collar gig work $16,883 $2,836 $766
Online tutoring $20,376 $2,832 $453

As part of the study, the subject’s filed tax returns were also compared against item-level reviews of bank statement and receipt data. Below is a summary of the most commonly missed types of tax write offs missed by subjects of the study.

Commonly missed tax write off # participants missed % participants missed Avg. resulting tax overpayment when missed
Phone bills 47 23% $112
Software subscriptions 64 21% $36
Car insurance, roadside assistance 141 19% $154
Business meals 35 16% $77
New electronics 25 14% $123
Business travel expenses 33 11% $80
Company Contact Country
Alfreds Futterkiste Maria Anders Germany
Centro comercial Moctezuma Francisco Chang Mexico
Ernst Handel Roland Mendel Austria

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Paul Koullick

Global

Paul Koullick is the co-founder and CEO of Keeper. He's committed a decade of his career to the consumer tax industry, and has been quoted as an authority on taxes in U.S. News & World Report, Vice, Forbes, and others. Paul holds an A.B. from Harvard University, and loves jogging and chess.