The voices of Tax Policy Center's researchers and staff
For all the attention being lavished on the gig economy, we still have much to learn about those who are working in it. But we are pretty sure about one thing: Many independent contractors and on-demand workers are not paying the amount of tax they should.
Some are under-reporting income or claiming deductions to which they are not entitled, a problem with sole proprietors and other small business that long predates the world of Internet commerce. At the same time, some are failing to claim business deductions they should be taking. And many, by underpaying self-employment taxes, collectively may be missing out on billions of dollars in future Social Security benefits.
As these workers build relationships with web-based platforms such as Uber, Etsy, Task Rabbit, and Airbnb, their links to the tax system become more complex. On one hand, they are abandoning the strictly cash businesses of the past where tax avoidance was simple—and widespread. In exchange for the convenience of connecting to customers through web-based platforms, these workers may be creating a digital paper trail that makes cheating harder but also could make tax filing easier.
Last week, I moderated a fascinating Tax Policy Center panel that debated the issue of taxes and the gig economy. The panelists, including Caroline Bruckner of American University, Pooja Kondabulo of Airbnb, David Williams of Intuit, and IRS National Taxpayer Advocate Nina Olson, disagreed on some issues, but they agreed on some important ways to improve tax compliance for platform-based workers.
Income and payroll tax withholding would be the most comprehensive solution, but mandatory withholding probably isn’t in the cards any time soon. It is difficult for online platforms to know how much to withhold when workers may have multiple sources of income and expenses. In addition, independent contractors and on-demand workers generally are not considered employees for tax or other purposes. And most platforms want to keep it that way.
The reasons have more to do with legal liability and obligations to pay employee benefits than taxes. Yet, unless they are either required to withhold or are granted some safe harbor from the employee designation, the platforms are unlikely to take this step. Another option is for them to voluntary withhold, an idea Nina recommended.
Better information reporting is another route. The platforms already report income to gig workers, thus the administrative costs of using the data to prepare Form 1099s ought to be relatively low.
But the platforms are wary of issuing 1099s as well. The unstated reason: They’d make it harder for gig workers to evade taxes by underreporting income. If my platforms reports income to the IRS and yours does not, well, some less-than-honest workers will gravitate to yours. Thus, as Pooja suggested, the same rules need to apply to all platforms.
Technically, platforms could prepare 1099s today for workers and the IRS. But the firms operate under an extremely generous exemption that effectively eliminates reporting requirements for all but a few contractors or on-demand workers: Generally, businesses must prepare a 1099-MISC whenever they pay a worker (or vendor) more than $600 annually. But a different threshold applies to 1099-Ks, which most platforms have chosen to use. They are required only for workers who annually bill at least 200 transactions or $20,000. Not many ride-sharing drivers or home rental hosts meet those standards.
There is some movement. Lyft is producing 1099s for all drivers who make $600 or more. Massachusetts and Vermont have set a $600 state income tax threshold for all contractors and on-demand workers. And a bill introduced in 2017 by Sen. John Thune (R-SD) would set a $1,000 reporting threshold for all 1099 workers.
At the very least, platforms and the IRS can do a better job providing gig workers with tax preparation information and guidance.
Both anecdotes and surveys suggest that these workers know very little about their tax obligations. Caroline noted that many students who have side businesses are entirely unaware that they owe taxes at all.
Recent surveys have found that one-third of these workers did not know that they may have to make estimated tax payments or what records to keep, and nearly half didn’t know how much tax they owed. Similarly, few know what deductions they are entitled to take. And David reported that nearly half of younger gig workers say they have been audited—a share vastly higher than actual IRS audit rates.
The price of ignorance
Pooja noted that Airbnb does offer its hosts significant tax support, including guidance about how to prepare returns. But other platforms do little or nothing for their workers, essentially leaving them on their own. And, as Nina noted, the IRS needs to do a lot more to make tax filing understandable to on-demand workers.
Ignorance of income and payroll taxes can hurt gig workers. Caroline and Tom Hungerford have estimated that in 2014, independent contractors and on-demand workers under-reported self-employment income and, thus, underpaid nearly $7 billion in self-employment tax. While that may have put additional immediate cash in their pockets, it also may reduce their Social Security benefits in retirement.
Like the rest of us, gig workers are obligated to pay taxes. But many, who don’t have steady jobs that withhold taxes and produce W-2s, are not well connected to the tax system. Both the platforms and the IRS need to do more to help them get their taxes right.
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