‘The year of the 1099er’: Credit Karma launches online tax prep service

Early tax filers in the U.S. got their first chance to file their taxes this week. When they do, they’ll be greeted by an increasingly competitive market that’s looking to help them prepare and file their taxes online.

Side Hustle Nation

Online tax preparation services are competing to attract more Americans working side hustles to bring in additional sources of income. Workers in the gig economy, who do things like moonlighting as Uber drivers or design graphics on Fiverr, need help filing this income and the online tax software firms are vying for their business.

Americans are turning to software to help them with state and federal taxes — DIY software accounted for 40 percent of returns in 2016, up from 30 percent in 2009.

americans file their taxes online

“This year is the year of the 1099er,” said Richard Lavina, CEO of Tickmark, a tech firm that built Taxfyle, a popular app that connects filers with professional tax preparers. “Almost every other person in the United States received a 1099 this year.”

Credit Karma gets into the tax game

Popular personal finance app, Credit Karma is also getting into the tax prep game with its new free online tax preparation service. The new service allows users to e-file state and federal taxes for free.

The service was first announced on December 7, 2016 and the company claims it had built a waitlist of over a million members within the first two weeks.

Free doesn’t always mean free

Credit Karma enters the competitive market of online tax prep, dominated by Intuit’s TurboTax product. Many competitive products, TurboTax included, claim a free version of their software to attract new users to their services. The IRS has teamed up with some of the leading online tax software companies to create the Free File Alliance, to help an estimated 100 million Americans e-file their federal taxes for free. 

Consumers frequently complain, though, about the fine print associated with these free services, which can be confusing. Some require a user to input credit card information and try to upsell users on other services. These free services aren’t for everyone — they have maximum yearly income ceilings and don’t always include 1099 income as part of their packages.

“As a result, we’ve seen the tax filing population split into two distinct categories: those that have simple returns (W2ers) and those that involve a bit more judgment,” said Lavina, who along with other big firm CPAs, launched Taxfyle to provide on-demand access to tax professionals. “Across the board, pricing for assisted tax prep to do-it-yourself tools have come down.”

Credit Karma’s tax service claims to be entirely free, like the firm’s core product, free credit scoring. And like with scoring, the firm makes money by referring financial services and products, like credit cards and loans. Giving away free tax preparation gives Credit Karma an additional intimate view into the financial lives of its users. 

“Our mission at Credit Karma is, and always has been, to promote and empower financial progress for everyone – for free. Credit Karma Tax is no different,” said Credit Karma Founder and CEO Kenneth Lin. “We focus on providing a great experience for consumers and understanding their needs. With the addition of Credit Karma Tax, we’ll be able to further fine tune and make even better recommendations to help our members manage their finances.”

The company’s early marketing around the new service draws on the frustration Americans have with their IRS filings. In its launch video, Credit Karma describes how easy it is for people in the UK to do their yearly taxes — in many countries, employers are responsible for federal filings. So, while American citizens struggle with preparing their taxes, devoting on average 13 hours to the process, they could be out, grabbing coffee, and living life.

Raising the bar for online tax prep

Free services like Credit Karma’s are putting downward pressure on fees in the tax preparation industry. To counter, competitors in the space are adding functionality to their premium products and services to get customers to pay up.

TurboTax, for example, offers SmartLook, which connects customers with a live TurboTax expert. These sessions use a technology to visually guide a user through their questions, drawing on their screen to fully explain how to use the software.

Whether they choose free or premium services, people prefer to use software for their taxes. In 2017, the IRS expects more than four out of five tax returns will be prepared electronically using tax return preparation software. Software providers want a piece of that action.