How to tax the gig economy
WASHINGTON – Massachusetts and Vermont are leading the way among states in closing the tax revenue gap caused by unreported income from the gig economy, a top official from American University’s Kogod Tax Policy Center said Tuesday.
Caroline Bruckner, an executive in residence at AU's Department of Accounting and Taxation, said those two states last year lowered the threshold for reporting Form 1099K income to $600, a move that has increased reporting by 100%.
The U.S. Government Accountability Office estimates the federal net tax gap at $458 billion, with under reporting of business income by sole proprietors representing the largest share of individual income tax under reporting. States and local governments with income taxes face a similar tax gap.
The Internal Revenue Service does not require individual taxpayers to file a Form 1099K unless they receive at least $20,000 in income from credit cards or third party processors, or have at least 200 transactions. But income received on Form 1099 Miscellaneous is reported when it reaches $600.
An IRS letter ruling in 2016 affirmed that so-called platform employers such as Uber and Lyft have a special safe harbor for not issuing 1099s until that $20,000 in income or 200 transactions is achieved, said Michael Udell, founder and managing director of District Economics Group.
“There’s an inconsistency there that needs to be addressed,” Udell said.
That disparity in the two thresholds has allowed many participants in the growing gig economy such as drivers for Uber and Lyft from reporting that income to the IRS, said participants at a forum sponsored Tuesday by the Urban Brookings Tax Policy Center.
The safe harbor has long applied to the sale of goods, such as flea market sales by homeowners and individuals who sell items on eBay, Udell said. The IRS letter ruling said the safe harbor applies not only to goods, but also to services.
Airbnb also uses the $20,000 threshold, said Pooja Kondabola, the company’s senior tax policy manager. The average Airbnb host in the U.S. rents 42 times a year and makes $7,000, she said.
Moonlighting in a second job is common among Uber and Lyft drivers, as well as other gig economy workers, said Adam Looney, a senior fellow at the Tax Policy Center. About 40% don’t earn enough to be required to report that income, he said.
As a result of the new laws in Massachusetts and Vermont, “The platforms started giving the 1099Ks in January and that’s when all hell broke loose with the Uber drivers and shop owners in those states who had never received a 1099K before,” Bruckner told The Bond Buyer.
Kondabola said Airbnb also began complying with the new reporting thresholds required by Massachusetts and Vermont.
California and New York officials are considering making similar changes, Bruckner said.
In testimony she delivered to the Senate Finance Committee in July, Bruckner said that IRS reported the number of filers penalized for underpaying estimated taxes rose nearly 40% between 2010 and 2015 to 10 million.
Self-employed workers are likely to be self-employed the following year, said Elaine Maag, a senior research associate for the Tax Policy Center. Men are more likely than women to be self-employed and those women tend to have children and be mid-career, Maag said.
Senate Republicans last year decided to not include in their tax legislation a bill authored by Sen. John Thune, R-S.D., to create a uniform $1,000 threshold for Form 1099 reporting. His New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549), also covered the classification of workers as independent contractors versus employees.
The nonpartisan congressional Joint Committee on Taxation estimated the Thune bill would have raised $3.6 billion, according Bruckner, who said her center estimated the amount to be at least twice as much.