Despite the meteoric rise of Uber, AirBnB, and the rest, the shift from salaried W2s to 1099s is not predominantly driven by these high-profile companies. Uber drivers still represent a rounding error of this market.

The following is excerpted from a report by Arjan Schütte (@arjanschutte) and Colleen Poynton (@c_poynt).

Arjan Schütte is the Founder and Managing Partner of Core Innovation Capital, a leading venture fund investing in financial services companies that empower everyday Americans. Arjan is also a Senior Advisor to the Center for Financial Services  Innovation, the nation’s leading authority on financial health, and previously spent 12 years as an entrepreneur in several venture backed companies. Arjan earned an MS from the Media Laboratory at the Massachusetts Institute of Technology, and his BA at Lewis & Clark College.

Colleen is a Vice President at Core Innovation Capital, where she covers consumer and small business credit, next gen payments protocols, and insurance. Colleen’s prior experience includes sourcing high-impact entrepreneurs with Endeavor Global, launching and scaling a double bottom line commercial real estate start-up, and developing inclusive financial products and services with a Chicago-based CDFI. Colleen holds an MBA from Columbia Business School, and graduated Magna Cum Laude from Princeton University. 

Get the full report here.

America prides itself on being a nation of entrepreneurs. And with more than 1 in 10 US adults starting or running new businesses, we are. Yet the vast majority of US entrepreneurial activity is small — nano small. Three-fourths of US firms have zero payroll — they are one-man bands. And the ranks of self-employed “solopreneurs” are growing fast, with 53M Americans freelancing today, and upwards of 66 million Americans, or 40% of the workforce, by 2020.

A 2014 study found that 83% of corporate executives report an increasing use of “contingent, intermittent, or consultant” workers. Data collected by ZenPayroll also shows a dramatic increase in 1099s in the small- and medium-sized business segment across major metropolitan regions.


For those of us who work in tech, not a day goes by without coverage of the next on-demand start-up: “Uber for X”, we quip. As these service platforms proliferate, so too do the ranks of 1099 workers they employ. Yet despite the meteoric rise of Uber, AirBnB, TaskRabbit, and the rest, the shift from salaried W2s to 1099s is actually not predominantly driven by these high-profile tech companies, at least not yet.



The New Normal: 1099s Are Here To Stay

Three key economic, political, technological, and cultural forces are combining to drive this growth, and together, explain why 1099 status, i.e. the prevalence of independent contractors rather than W2 employees, is the new normal:

  • Cost: It’s cheaper. Employers save by avoiding payroll tax obligations, reducing benefit outlays, and achieving more optimal utilization of labor. By classifying workers as 1099s rather than W2s, employers are able to cut these expenses and reduce payroll costs as much as 30%. It’s not a coincidence that ZenPayroll data illustrated in the chart above above shows a substantial uptick in 1099s across major US cities over the same period that the Affordable Care Act went into effect. Businesses on the edge of the 100 full-time employees threshold likely shifted noncore labor to part-time or 1099 workers to avoid added healthcare costs.



  • Technology: It’s possible. From Fortune 500 corporations to Main Street, we are witnessing a great unbundling of American businesses, made possible by affordable, accessible software, wireless infrastructure, and ubiquitous mobile connectivity. “On Demand” is just the latest advancement of a broader trend — the unbundling of American businesses. Over the last decade, capital-efficient SaaS companies have made it possible for businesses to access “[you name it] in a box” — accounting, procurement, inventory management, HR, payroll, benefits, legal services, and so on. Only with the recent proliferation of smartphones, geolocation capability, mobile internet and payment infrastructure, and sophisticated workforce management software — has it become relatively easy to transform a large portion of labor costs from fixed to variable.


  • Lifestyle: It’s preferable. Depending on individual circumstance, contractor status may confer certain advantages, such as greater flexibility and control over the nature and timing of work. “On-demand” engagements also enable workers to monetize excess time and assets more easily. For some, 1099 status is a choice. Indeed, 53% of contractors do freelance work by choice, vs. 47% who do so out of economic necessity. Within the subset of contractors who also hold full-time jobs, about 36% (5.1 million people) have considered quitting their full-time position to exclusively freelance. For some, freelancing is clearly preferable. 1099-5

And regardless of educational attainment or skill specialty, the proliferation of on-demand platforms allows individuals to monetize excess assets, time, or capacity with relative ease. Sixty-nine percent of freelancers agree technology has made finding work easier, with 42% finding work online, and 31% of those booking work in less than 24 hours. The vast majority report experience increasing demand for their labor over the past year, suggesting contract work will be an attractive option for many for years to come.

1099 Problems

As a fin tech fund, we look at this data and ask ourselves – so what? What does 1099 status mean for Americans’ financial lives? Quite a bit, it turns out. The financial ramifications of being a 1099 worker are significant and touch on almost every major product category we invest in — credit, payments, insurance, savings, and personal financial management. 1099 status creates serious pain points for a large and growing segment of the American workforce. At Core, we see a robust batch of fin tech entrepreneurs working to address these problems by building financial products tailored to the specific needs of 1099s.

  • Tax — Costly & Complex: Paying taxes is perhaps the most obvious challenge faced by contractors. Come April, accurately separating personal and professional expenses in order to maximize business deductions is a headache. Not only is filing more complex as a 1099 (asset depreciation schedules, anyone?), you’re also on the hook for 2x what your W2 colleagues pay in entitlement obligations. Employers split the 15.3% payroll tax earmarked for Social Security and Medicare with W2 employees, but 1099s must pay it all themselves.
  • Income — The Volatility Trap: Flexibility, control, and project diversity have a dark side – it’s called volatility. Income volatility is the most common and significant pain point experienced by self-employed. When both wage and hours fluctuate, income is extremely difficult to predict. That means it nearly impossible to reliably match income to expenses, making budgeting a no-go.
  • Liquidity — Cash Is King: Liquidity is also a large and frequent challenge for 1099s. Pay cycles for self-employed contractors can easily be 30 or 60 days after services rendered, leaving workers in a major cash crunch. In addition, workers must deal with any dispute resolution or payment collection issues that arise with a client themselves. This takes time, and time (when you have no fixed salary) is money. New York State estimates $3-5 billion in freelancers’ wages were lost in New York alone due to client nonpayment and the opportunity cost of time spent trying to collect.
  • Savings & Insurance — Limited & Lacking: Historically, most workers obtained insurance and retirement benefits through employers, who would hire brokers to sort through a morass of plan options, offer a package of choices, and manage enrollment paperwork. Without any of that infrastructure, and none of the scaled purchasing power that employers wield, 1099s are left sourcing insurance and retirement plans themselves, and paying a premium for it. The result? Self-employed workers are 22% less likely to have any retirement assets, and much of the gap comes down to access.
  • Credit — Life Outside The Box:  In the realm of credit, self-employed borrowers present unique challenges with respect to underwriting and product design. Because their income is often spiky, seasonal, or contractually temporary, 1099 workers are likely to fail the income verification requirements of traditional bank lenders for large products like mortgages and auto loans. Small business owners embody the struggle of the self-employed to access affordable credit — with one specialty lender estimating that 60% of small business owners are unable to access traditional “qualified” mortgages.

A few startups focused on 1099-related services. Click on the image to enlarge. 


Challenges & Outlook

It is encouraging to see so many companies working to address the financial needs of this growing market. Yet we are clear-eyed about the challenges they must overcome in order to gain traction, scale efficiently, and build sustainable businesses.

  • Regulation: It’s the elephant in the room — the issue of misclassification is attracting increasing scrutiny at both the federal and state level. Recent state court cases brought against on-demand platforms Uber and Homejoy challenge the notion that workers on those platforms can properly be classified as 1099 workers. For HomeJoy, these suits accelerated the decision to shutter the struggling business. In July, The Department of Labor issued a statement reaffirming the proper distinction between 1099 and W2 workers, and emphasized growing concern over the practice of misclassification.
  • Product Market Fit: Given that we can expect a wide diversity of independent workers to participate in the labor force for years to come, companies must avoid the pitfall of lumping all 1099s into the same bucket. While they share certain characteristics, 1099s are an incredibly heterogeneous group, with wildly different income, credit, and industry profiles.
  • Distribution: Clearly defining the subset of 1099s who are high-propensity customers is not only critical to effective user testing and finding product-market fit, it is also necessary to overcome the second major challenge in this market – efficient distribution. 1099s are diffuse. Many startups are looking to partner with other tech-forward platforms to distribute their product, and in some cases this may be a viable strategy. But Uber won’t partner with everyone, and even if it did, Uber drivers still represent a rounding error of this market. Most 1099s are still spread across that maddening blue ocean — small businesses.
  • Retention: Finally, companies must think carefully about the duration of their relationship with the customer. The golden ratio of lifetime value to acquisition cost is central to the long-term profitability of any company, and fin tech companies serving 1099s must be especially sensitive to this, given the inherent fluidity of 1099’s financial lives. These customers are more likely to shift between platforms and clients. They may move in and out of 1099 status multiple times in their lives. Payment, financial management, and savings tools must be portable, flexible, and interoperable. Insurance and credit products must remain relevant and competitive as the needs and opportunity set of the customer evolves.


The rise of the “1099 Nation” is a structural shift driven by economics, policy, technology, and cultural forces — it is unlikely to reverse in our lifetime. Growth in 1099 workers will not halt in the face of regulatory scrutiny, though the way contractors are sourced, hired, and engaged will certainly evolve. Whether individuals freelance by necessity or choice, 1099 status imposes unique financial complexities and pain points. This represents a huge opportunity for financial services companies to innovate by rethinking traditional products and designing entirely new ones.

Fin tech startups generally, but especially those targeting this segment, must consider the needs and unique characteristics of this market, and tailor their product, distribution strategy, and business model accordingly. The payoff is big. Banking the 1099 Nation will enhance financial stability and mobility for millions of Americans — and that will unlock massive value for companies, their investors, and their customers.

bio-schutte-color2Arjan Schütte is founder and managing partner at Core Innovation Capital. He is also a Senior Advisor to the Center for Financial Services Innovation and prior to that served as a senior manager at CFSI from its inception until Core was launched in 2010.


bio-poynton-color2Colleen Poynton is a vice president at Core Innovation Capital. Prior to joining Core, Colleen was a manager in the strategy and product development group at Investing in Communities and an economic development fellow at Princeton AlumniCorps.