Last month, Professor Caroline Bruckner of the Kogod Tax Policy Center delivered a report to Congress detailing the failure of our tax system to keep up with the growing on-demand economy of companies like Airbnb, Uber, Lyft, and others.
As part of their research, Kogod spoke to individuals working in the on-demand economy, tax practitioners and representatives from on-demand platform companies and surveyed members of the National Association of the Self-Employed (NASE) to find out how well these workers understand the tax implications of their work.
The results did not come as a surprise to most tax professionals who work with on-demand workers. The survey found that among respondents who had worked for an on-demand platform company during 2015:
- 1/3 did not know whether they were required to file quarterly estimated tax payments
- 36% were not familiar with the kinds of records they would need to maintain in order to substantiate income and expenses for their work
- 43% had no idea how much they would owe in tax for their on-demand work and had not set aside money for taxes
- 1/2 were unfamiliar with deductions and credits that could be used to offset their self-employment income
Making matters worse, tax reporting by the on-demand platform companies is a mixed bag of forms and reporting requirements. On-demand companies are required to report the workers’ earnings to the IRS and to on-demand workers via a 1099-K if they are paid by credit card. However, this rule only applies if they earn at least $20,000 and have 200 or more transactions in a year.
The companies are required to issue 1099-MISCs to workers who earned over $600 in a year via the service, but credit card transactions do not have to be reported on the 1099-MISC. As a result of these conflicting requirements, the study found that more than 60% of those surveyed did not receive a 1099-K or a 1099-MISC.
This gap in reporting requirements is a losing proposition for confused workers who have a difficult time properly reporting income earned from the on-demand economy, leading to the potential for penalties and potential audits. It also shortchanges taxpayers when the IRS is unable to properly assess and collect taxes from this economy.
On May 26, National Taxpayer Advocate Nina E. Olson addressed a House Small Business Committee hearing on the issue and encouraged the IRS to increase their education and outreach efforts to assist the growing number of workers in the sharing economy.
By Janet Berry-Johnson, CPA