In the many discussions about the future of work in California, the topic of independent contracting holds a prominent and much debated position. The growth of on-demand labor platforms such as Uber and TaskRabbit has fueled concern that “gig” work could replace traditional jobs and result in chronic economic instability, especially in communities of color. Worker advocates have also long been concerned about the misclassification of workers as independent contractors, leading to the passage of AB5 in 2019. More recently, the exclusion of independent contractors from key workplace protections was put into sharp relief during the COVID-19 pandemic.
As the economy recovers, good data on independent contracting will be vital to responding to trends in the 21st Century labor market, as well as to the ongoing task of measuring the underreporting of independent contractor income by tax authorities. In this report, we leverage recent innovations in analyzing tax data to shed new light on the prevalence and characteristics of independent contracting in California. Our research stems from a unique partnership between the California Tax Franchise Board, the California Policy Lab at UC Berkeley, and the UC Berkeley Labor Center. This partnership enabled us to access (fully anonymized) individual tax filing data for California residents for the years 2014 to 2016. The analyses in this report focus on the population of California residents, aged 18-80, who e-filed their taxes and had positive earned income. (See the full report for details on data and methods, and other research generated by this partnership).
The Prevalence of Independent Contracting
- We found that traditional W2 work is still by far the most common way that workers earn a living in California. In 2016, the large majority of workers (81.7 percent) only held a traditional W2 job. Independent contracting was the sole source of income for 8.6 percent of workers during that year, and another 9.7 percent combined independent contracting and traditional W2 work.
- For many workers, there was significant stability in their work activity from one year to the next. But we found much less stability among workers who mixed W2 work and independent contracting. More than a third (35.4 percent) of those who mixed work activity in 2015 had transitioned to only holding a W2 job a year later, in 2016. And a smaller share (7.8 percent) had transitioned to only independent contracting in 2016. The mixing of W2 work and independent contracting, whether concurrently or sequentially, is often a temporary state.
- In line with other research, we found that the proportion of workers with any independent contracting income in California showed minimal change between 2014 and 2016.
The Characteristics of Workers Engaged in Independent Contracting
- Workers who engage in independent contracting in California are a diverse group in terms of their demographics, household income, and the kind of work they do. However, we also found several distinct patterns. For example, in 2016, workers who only relied on independent contracting for their income were more likely to be older, married, and living in lower-income households, compared to other workers.
- Independent contracting is found across California’s economy in a wide range of industries. Relative to W2 work, independent contracting in 2016 in California was overrepresented in construction; transportation and warehousing; real estate; professional services; arts, entertainment, and recreation; repair and maintenance personal services; child day care services; janitorial and landscaping services; and direct selling establishments in retail.
- The industry distribution of independent contracting did not change significantly between 2014 and 2016, with several exceptions. As one example, the share of independent contracting work in transportation nearly doubled during this time (not surprisingly given the growth of rideshare platforms).
The Earnings of Independent Contracting
- We found strong differences in the earnings associated with independent contracting and W2 work. Compared to other workers, low earnings were more prevalent among those who relied exclusively on independent contracting in 2016 (although the size of this difference is unclear due to measurement issues).
- By comparison, workers who supplemented their W2 jobs with independent contracting had higher earnings. For these mixed-income workers, the median share of earnings from independent contracting was only 4.2 percent, indicating that their W2 job was typically still their main source of income. That said, this supplemental income was especially important for low-wage workers.
- The industry profile of independent contracting varied across the earnings distribution. Independent contractors with low earnings were more likely to work in industries such as personal services, janitorial services, and landscaping. Independent contractors with higher earnings were more likely to work in industries such as professional services, transportation, construction, and real estate.
Independent Contracting Among Older Workers
- Not surprisingly, we find that many people in California stop working as they get older and retire. However, while the prevalence of W2 work declines steeply during this time, many older and retired tax filers continue to use independent contracting as a source of earned income, long after they stop working at their W2 job. As late as age 75, fully 9.8 percent of tax filers were engaged in some amount of independent contracting in 2016.
- Lower-income older workers were less likely to be working and more likely to rely on just Social Security. But when they did work, they were more likely to rely exclusively on independent contracting (and less likely to work at a W2 job).
- Lower-income and higher-income older workers differ in the industry profile of their independent contracting, largely mirroring differences among their younger counterparts.
Types of Independent Contracting
- We identified three distinct types of independent contracting. In 2016, 12.1 percent of California workers reported earnings from non-1099 independent contracting (for example, massage therapists who were not hired by a firm but instead provided services directly to consumers, and therefore did not receive a 1099 form). Another 4.8 percent reported earnings from what we term “traditional” 1099 work (like graphic design freelancers who received a 1099 form from the company that hired them). Only 1.4 percent of workers reported earnings from on-demand labor platforms (like Uber). The fact that platform workers made up only a very small share of the workforce in 2016 may be surprising, but other research using accurate measures has arrived at very similar estimates, including the most recent study analyzing 2021 data.
- Compared to other workers engaged in independent contracting, platform workers were younger, largely working in the transportation industry, and distinct in their high rate of mixing independent contracting with W2 jobs (only 20.7 percent relied solely on platform work for their income).
- Non-1099 independent contractors were unique in that the majority engaged solely in independent contracting work; they were also more likely to report working in janitorial and landscaping services, construction, and repair and maintenance.
The Firms Using 1099 Independent Contractors
- We found that firms in California continue to rely primarily on a traditional employment model, with only about one in five (18.6 percent) reporting that they paid 1099 compensation in 2016.
- Overall, $574 billion in W2 compensation and $17.6 billion in 1099 compensation was paid by California firms to California resident tax filers in 2016. That means that only a small share of total compensation in the state (3.0 percent) was issued to 1099 independent contractors.
- Two industries stand out as having a much higher proportion of firm compensation going to 1099 independent contractors than the other industries: transportation and warehousing (20.7 percent) and real estate and rental and leasing (20.0 percent).
- Other industries with above-average proportions of 1099 compensation include specific subsectors such as advertising, securities brokerages, and insurance carriers; childcare, youth services, and ambulatory health care centers; and consumer-focused services such as house remodeling, beauty salons, and direct selling.
Going forward, tax data should continue to be used by the State of California to measure trends in independent contracting. Due to limitations in data availability, we were only able to analyze data through 2016. However, the world has changed since then—including the introduction of new laws and the COVID-19 pandemic. Further research using tax data can help shed light on how independent contracting, and work for on-demand platforms in particular, may have changed since 2016, especially during the course of the pandemic.