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The Stimulus Bill’s Tax Change for Gig Workers: Explained (2)

March 11, 2021, 3:00 PM; Updated: March 11, 2021, 7:15 PM

Buried in the latest stimulus measure is a provision intended to help gig economy workers correctly pay their taxes and keep the IRS from losing out on hundreds of millions of dollars in annual revenue.

The bill that President Joe Biden signed into law Thursday will amend the tax code to require Uber, Lyft, and other platform companies to tell more contract workers how much money they have made on those platforms, starting with the 2022 tax year. In many cases under prior law, they have only had to report the incomes of people with a very large number of earnings and transactions.

While it could soon be a rude awakening for gig workers who haven’t been closely tracking their tax liability, professionals who sort out and study these workers’ tax conundrums say it is a great first step in the right direction.

The new reporting requirement for these companies will help address a larger, long-term problem—a buildup of workers’ unpaid back taxes—said Ted Afield, director of the Georgia State University College of Law’s low-income taxpayer clinic.

A lack of information reporting “can cause their compliance problems to just continue to spiral,” he said. The law’s change, he added, is “going to be very helpful in hopefully preventing some of these problems from arising in the first place.”

How do gig economy workers pay taxes?

Keeping track of taxes can be difficult for gig workers. The tax code was written for established businesses that hire bookkeepers, not people with side jobs they can set up overnight with an app. Self-employed people have to make quarterly estimated payments and pay double the Social Security and Medicare tax rates that employees pay. And many aren’t aware of this, or keeping track of their taxes at all.

That means many risk getting audited and owing back taxes they aren’t prepared for and can’t afford.

It also means many aren’t paying into the nation’s social safety net or reporting earnings that later qualify them for retirement benefits, according to research from Caroline Bruckner, managing director of American University’s Kogod Tax Policy Center, who has testified on these issues before Congress.

How do they know what they owe?

Under the stimulus bill, for the 2022 tax year going forward, more workers will receive a Form 1099-K, which shows their gross income from gig economy platforms and which companies send to the IRS.

The law and IRS guidance previously only required companies to send many workers these forms if the individuals earned more than $20,000 in income over more than 200 transactions, which is a high bar for the average person with a part-time side gig. The new law requires companies to send workers those forms if they earn more than $600, regardless of the number of transactions.

Depending on what they do for the companies, some workers have already gotten and will still get a Form 1099-MISC, telling them and the IRS how much they made from that work, if they earned more than $600. Some food delivery apps, for instance, have used this form and threshold instead.

How much will that help?

It is a good start, according to those who focus on tax issues in the gig economy.

While some companies have online tools for workers to track income and expenses, just 30% of platform workers made more than $5,000 in 2016, so most of these people aren’t receiving 1099-K forms, according to a May 2020 Government Accountability Office report. An internal IRS watchdog similarly found that the $20,000 threshold may be leaving out the vast majority of workers, and that bringing it down to $600 would bring a significant portion of them into the loop.

But this bill’s change is no panacea. Just because people can see their income on a 1099-K form doesn’t mean they’ll keep track of the taxes they might owe on that income.

“It’s not telling you what you need to pay your taxes or what you need to do that,” said Nancy Dollar, an associate at Hanson Bridgett in San Francisco. “It’s just telling you how much in payments have been transacted through the third party, so it’s still on you to have backup documentation to show whether you’re operating at a loss or profit for tax purposes.”

What’s the company stance?

More reporting forms amount to an extra cost for the platform companies, and some are worried it will scare away users.

Carl Holshouser, a senior vice president of TechNet—a trade group that counts GrubHub, DoorDash, Lyft, Postmates, TaskRabbit, and Uber among its members—said in an emailed statement that on behalf of its member companies, the organization is opposed to this provision of the law.

He described the amended reporting requirement as “fly-by-night taxation of gig workers and small business owners.”

A spokesperson for Lyft said the company supports the law and a lower reporting threshold. Lyft was among multiple companies that lobbied on a bill (H.R. 1625, S. 700) introduced last Congress that sought to bring the thresholds for both forms to $1,000 and create a test for classifying workers as independent contractors.

What’s next?

Experts in this area characterize the heightened reporting requirement as easy, low-hanging fruit and say there is more to be done.

Kathleen DeLaney Thomas, a professor at the University of North Carolina School of Law who has researched this issue, has proposed a new standard deduction for these workers, as well as withholding by the companies to make things easier for these individuals. This could be politically fraught, however, as it makes companies like Uber and Lyft more like employers in a time when they’re fighting worker classification battles at home and abroad.

Thomas told Bloomberg Tax she expects “a big jump in compliance for people that weren’t reporting that now effectively have to” as a result of the stimulus law’s change, calling it “the first and most obvious and in a way simplest step.”

(Updates with bill signing in second paragraph. A previous update added the new schedule for bill signing. )

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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