FROM http://time.com/money
Many don't see themselves as small business owners and aren't ready to deal with one of the great two certainties in life: taxes.
In the “gig economy,” millions of people provide services and resources using online platforms. Get on the right software, pay the going rate, and you can find a bed in Tuscaloosa, get a ride in Piedmont, have your screen door repaired in Scranton, and wait for dinner to be delivered to your door in Walla Walla.
But as more people turn to software platforms to supplement their income or provide full-time revenue, there’s a problem. Many of those involved don’t see themselves as small business owners and aren’t ready to deal with one of the great two certainties in life: taxes.
A lack of sophistication may keep them from realizing that they have tax reporting obligations — and may also keep them from taking advantage of deductions that could potentially reduce the overall amount they owe in taxes, including that from a full-time job. Furthermore, current tax laws create a loophole in which many of the gig workers have income not reported to the IRS, which may leave them thinking they have no obligations.
According to a study from the National Association for the Self Employed and American University’s Kogod Tax Policy Center, many gig workers don’t realize that they have to file as a small business. “They don’t see themselves as self-employed,” said Katie Vlietstra, NASE vice president for government relations and public affairs. “They see this as a side hustle.” They may think that “taxes were taken out, because they don’t know better.”
“Everything is taxable unless [Congress tells] you that it’s not,” said Manuel Pravia, a CPA and principal of Morrison, Brown, Argiz & Farra. “If you find $20 in the middle of the street, you’re supposed to think, ‘I’ve been enriched by this and have to report it as income.'”
Many self-employed people come to their senses when they receive a 1099 form at the end of a tax year from every company that paid them $600 or more. But there is a loophole. Many of the platforms pay people through a third-party system. In that case, the necessary form is a 1099-K. But the third-party payer only has to send one to the worker, with a copy to the IRS, if the person made more than $20,000 and took part in at least 200 transactions over the year. Miss the threshold and you might not get that 1099-K reminder, and neither will the IRS.
In the study, 74% of people said that they had earned $5,000 or less in 2015. Although some companies like Uber send 1099-K forms to all their workers, many don’t, which means plenty of people who don’t get that annual reminder to think about taxes. And even some who make more than $20,000 might slip under the radar. If you rent out a space on Airbnb for $150 a night, $20,000 is just over 133 transactions for the year, not enough to trigger 1099-K reporting. It becomes practically impossible in such cases for the IRS to know if people are reporting their full income.
The scary part is the potential magnitude of the problem. The survey was self-selecting, contacting only NASE members, so isn’t representational of the working public as a whole. But you might expect that people who join an organization of self-employed persons would be more likely to view themselves as owning their own businesses. If people who identify as small business owners are so behind in understanding their tax obligations, what is the average driver, house cleaner, or pet sitter going to think?
The growth of gig work is massive. According to a 2015 study by Lawrence Katz of Harvard and Princeton’s Alan Kreuger, workers providing services through online platforms were 0.5% of all workers in 2015. That would translate into nearly 7.5 million people.
“A lot of the debate [about gig work] has been about whether these are really classified as employees,” said Caroline Bruckner, managing director of the Kogod Tax Policy Center. “Those issues are going to be settled by the courts. But in the meantime these folks have real tax challenges.”
The gig platform companies are reluctant to step in, say experts, because they are concerned about workers being seen as employees, not business owners. Keeping a strict distance and being wary of offering too much advice protects them.
Not only do workers miss tax obligations, but also opportunities. There is a “variety of tax benefits and tax deductions they can avail themselves of,” according to Mark Steber, chief tax officer of tax preparation chain Jackson Hewitt. Smart use of tax laws could even create a loss for many that could help reduce overall taxes. “If you don’t get help or educate yourself, you can leave money on the table.”
And yet, most of these people don’t even realize that they need to do research and their low income may make tax help seem unrealistically expensive — if they even knew to look for it.
“The IRS needs to come out with guidance immediately for the 1099 issue,” Bruckner said. And perhaps an easier way for people to account for the small amounts they make. Until then, billions in earnings may be going unreported.
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