If you ordered lunch through DoorDash or hailed an Uber this week, you interacted with independent contractors who power the the booming gig economy. Chances are, self-employed professionals also support the mobile app and payment fintech you used to place the order. The article you’re reading right now was written by a gig worker.
This workforce of independent contractors consists of skilled and unskilled labor, GEDs and post-grads, and minimum wage to six-digit earners. According to a 2017 study by Gallup and Intuit, nearly 20% of filers reported self-employment income, the highest percentage ever recorded in the 60 years the IRS has tracked this data. Some estimates put this percentage as high as 35-45%, especially as gig work expanded following the pandemic.
Gig workers enjoy some advantages over salaried employees, like a flexible schedule and more freedom to choose or pass on jobs. Multiple income streams create redundancies that can mean stabler finances than employees who live on a single monthly paycheck with no backup plan. For many, independent contracting allows a greater sense of agency over one’s work life.
Despite the size and relevance of this growing workforce however, they’re missing out. Compared to salaried employees, less than half as many gig workers enjoy benefits like employer-provided health insurance and 401K matches. Further, reporting income for the purposes of taxes and loan applications involves significantly more paperwork than a simple W2.
For most people, there will be times when a loan is needed to replace an appliance, buy a car, or purchase a home. Yet many independent contractors will have a harder time securing a loan than borrowers who work in salaried positions.
1983 called; they want their form back
Policymakers have long grappled with questions about how gig workers should be classified and how their income is reported. The result is a morass of new legislation, paperwork, and of course tax forms.
One significant change that’s simplified income reporting but also further muddied the waters: the return of Form 1099-NEC.
“Non-employee compensation” is how businesses report payments to independent contractors. Such compensation was reported on the 1099-NEC until 1983, when the IRS shelved this form with the aim of simplifying reporting. Payments to independent contractors were now reported in a single box on the 1099-MISC. As gig work became more prevalent in recent years, technology and payment systems advanced, and the one single box was no longer adequate. The resurrected and refurbished 1099-NEC would now provide all the necessary reporting for the paperwork gods!
Trouble is, some payments to third-party talent (e.g. legal fees) still require a 1099-MISC. Reporting gets still more confusing with payment apps. If you’ve used Venmo to pay your lawn guy or the cheese monger at your local farmers’ market, that payment is recorded for tax purposes. If anyone receives more than $600 a year for goods or services from a payment app, that app sends a 1099-K to the IRS. Recipients who cumulatively earn $20,000 or more must pay tax on those earnings. This means vendors or service providers who use multiple payment portals (say Venmo, PayPal, and CashApp) will need to enter data from multiple 1099-Ks.
Hearts, Minds, and 1099s
As our legal and tax structures evolve to accommodate new models of work and compensation, lenders and borrowers are presented with new challenges. Reporting annual household income with a W2 form is fairly straightforward. Need three months of pay stubs? An employer’s HR team can handle that. Based on this, most loan software can easily calculate an average income for an applicant, even factoring in variables like bonuses and commissions.
What about an applicant who earns irregular income as an Instacart shopper, occasional fees on Upwork, and sporadic commissions as a graphic designer? Without pay stubs showing a consistent monthly income, there’s a greater onus on this borrower to prove they can repay debt. Particulars such as credit score can hobble their application further.
Consider also the applicant who receives a W2 from their employer as well as a 1099 for a side hustle. It's a situation that applies to 4 in 10 Americans.
Currently there are 22 distinct Forms 1099. Aside from the NEC, MISC, and K that cover most gig workers, there are 1099s to reporting other non-employment income like pensions, life insurance benefits, and stock dividends. Navigating the labyrinth of 1099s and other forms can add hours of additional work to a loan application. Manually entering data from invoices and other supporting documents puts more humans in the loop, which potentially leads to more human error.
All these factors precipitate inequality in lending, which hurts business and disallows significant segments of the workforce from securing loans they should be entitled to.
New technologies have stepped to the new challenges. For example, fintechs like Bread and Affirm provide low and no-interest loans and allow customers to customize their repayment schedule.
For the biggest purchases in life, Baleen Lending helps alleviate inequality for self-employed workers who apply for home mortgages. With hands-off extraction technology that streamlines data entry, machine learning that ensures accuracy, and UI that facilitates rapid loan approval, Baleen empowers lenders to grow their market share and be the hero for underserved clients.
The landscape of work is changing; change with it. Evolve first and become the go-to lender for self-employed applicants and their realtors.
Sam Campeau blogs about all things pertaining to finance and technology for Baleen Solutions. In his free time, he watches the whales swim from his tiny fishing town in the Pacific Northwest.
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