On February 14, 2019, the TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION (TIGTA) released the Report “Expansion of the Gig Economy Warrants Focus on Improving Self-Employment Tax Compliance”. The report focuses on Taxpayers that are Self-Employed and participate in the Sharing Economy (Gig Economy) via on-line platforms providing services like Uber, Etsy and Airbnb. The TIGTA report states that self-employment tax noncompliance is on the rise from Taxpayers that earn income from the Sharing Economy.
High thresholds in the information return reporting obligations of many On-Line platform businesses
The report states that Taxpayers are more likely to be non-compliant if their income is NOT reported to the IRS. Treasury Regulations do not require certain Sharing Economy businesses to issue Form 1099-K unless workers earn at least $20,000 and engage in at least 200 transactions annually. As a result, many Taxpayers earning income in the Sharing Economy do not receive a Form 1099-K and their income is not reported to the IRS.
On-line platforms act as facilitators, not Employers
On-Line platforms bring together people offering a good or service with other people that need such good or service. However, they are not considered to be an “Employer” of a Taxpayer that is providing a service; as in a “traditional employment arrangement” where an Employer provides an Employee with a Form W-2 and withholds taxes throughout the year (Income Taxes, Social Security, Medicare).
Employee or Independent Contractor?
Worker classification or work status affects how a Taxpayer reports income, pays federal income taxes, social security and Medicare taxes, and files a tax return. Classification can affect a Taxpayer’s eligibility for Social Security and Medicare benefits, employer provided benefits and a Taxpayer’s income reporting and tax payment responsibilities.
The distinction between employee and independent contractor is an important one under US tax law. Common law rules are usually applied and the relationship between the “worker” and the “business” has to be evaluated. In the evaluation of the relationship between the “worker’ and the “business”, “the degree of control and independence” in the relationship is determining.
If You Are an Employee
An employer must withhold income tax and the worker’s portion of social security and Medicare taxes, pay worker’s social security, Medicare, and unemployment tax on wages and distribute Form W-2.
If you are an Independent Contractor
A business may be required to issue Form 1099-MISC (Miscellaneous Income) to report what has been paid during a year. In turn, an independent contractor is responsible for paying its own income tax and self-employment tax (Self-Employment Contributions Act – SECA). A business does not withhold taxes from an independent contractor’s pay. Independent Contractors need to make estimated tax payments during the year to cover their tax liabilities.
IRS is on to the Sharing Economy to Reduce the Tax Gap
IRS has determined that there is risk associated with underreporting of income derived from the Sharing Economy. IRS states that it will address tax non-compliance from the Sharing Economy to reduce the Tax Gap and increase Taxpayer understanding of income reporting and tax payment responsibilities.
The TIGTA report notes that the IRS Tax Gap analyses indicate that there is higher compliance when amounts are subject to information reporting (93% percent compliance) and that compliance is at 99% when subject to information reporting and tax withholding. The compliance rate is at 37% when there is no information reporting.
Don’t be a victim of your own making
If you are a participant in the “Sharing Economy” or “gig economy”, or if you are an independent contractor, consult your tax specialist. The Sharing Economy is a fast-developing area of the economy and there are tax implications for businesses that provide the service opportunities and the individuals who perform the services.