Tax information statement coming to Gig economy partners – now what?

The days of widespread underreporting of income from online platform work are coming to an end, but the tax challenges for individual participants in the platform-based economy and the IRS are long overdue from being over.

Many more gig economy workers will start receiving tax information reports from the digital platforms they use than before due to a preparation in the American Rescue Plan Act 2021. It is expected that increased income reporting and paying income with these partners. The next hurdle is to make sure they pay the right amount of taxes earned, and that problem will not be so easy to solve.

By law, if a digital platform partner receives $ 600 or more in total payments through third-party network transactions, the digital platform, referred to in the legislation as a third-party settlement group, is required to into reporting the payments.

The previous threshold for reporting was $ 20,000, and a participant was also required to have 200 actions before the platform had to submit a return of information. The new law removes the overall trade requirement.

The reporting requirement begins for results for calendar years beginning after December 31, 2021, giving platform companies the remainder of the year to prepare a Form 1099-K, “Payment Card and Third Party Network Transactions, ”Sent to platform users who meet the new, lower threshold.

Legislative change is prone to pandemic relief; such a move has been debated for years because it deals with a long – standing source in the fields of government and business. The $ 20,000 / 200 trading thresholds were set in 2008 as a balance for other spending, too, but online, on-demand work was less common at that time.

As the platforms and the number of participants grew, the thresholds remained the same, leaving many participants in the dark about their tax obligations.

Voluntary reporting was always an option for the platforms, but they ran into a legacy in offering it – if one platform provided reports voluntarily and another , was it not likely that participants would not change to avoid the statement? Some might, making individual platforms willing to start freelance reporting.

Increased reporting of information promotes the overall accuracy of income reporting, which should lead to an increase in tax compliance. The estimated revenue raised by this provision is the main reason it was included in the American Rescue Plan.

The Joint Committee on Taxation estimated that it would raise $ 1.1 billion in 2023 and $ 8.4 billion in total between 2021 and 2031.

Self-employment tax under-reporting is a big part of the tax gap, the difference between what taxpayers have and what they pay on time, and the IRS $ 69 billion, or 15% of, between 2008 and 2010, the self-employment share. the total $ 458 billion gap. Between 2011 and 2013, the IRS estimated the self-employed tax contribution to $ 51 billion, or nearly 12% of the $ 441 billion gap.

A key driver of that gap appears to be a lack of knowledge about seeding requirements, and the new reporting requirement should help educate taxpayers about their responsibilities.

In a study of members of the National Association for the Self-Employed who participated in on-demand work platforms in 2016, Caroline Bruckner of the American University sought to assess the tax compliance challenges of small business owners themselves -selected, self-employed.

Bruckner received widespread confusion about specific tax obligations and the record keeping necessary to meet tax obligations, and more than 60% of respondents did not receive any Form 1099 on the platform income. aca.

“The current situation is an unnecessary burden, a potential investigation and the imposition of a penalty for on-demand platform economy players. We can do better, ”she wrote.

Reducing the threshold to $ 600 will cast a wider net as many affiliates looking for on-demand work or selling on digital platforms make less than $ 500 per month and they are below the $ 20,000-a-year threshold. It seems that the taxpayers who are more likely to influence the change tend to use the platforms to supplement other wage incomes, especially in times of employment instability.

The JPMorgan Chase Institute analyzed payments from 128 online platforms to 2.3 million subscribers on these platforms between 2012 and 2018, and found that households are likely to turn to online platforms as a form of additional income when their pay-as-you-go income is broken.

A consortium of business organizations and companies, including the U.S. Chamber of Commerce and Etsy, wrote a letter to Congress in response to the proposed reporting requirement, arguing “in a year in which small business owners and entrepreneurs face a number of challenges. Making this change would worry small business owners and entrepreneurs and further exacerbate an already challenging tax season. ”

In the long run, the larger reporting and the most likely increase in tax payments may be an incentive for some taxpayers who were out of compliance. Self-employed taxpayers who do not pay self-employment taxes may be undermining the Social Security benefits to which they may be entitled in the future.

When information reporting begins for platform participants who were not complying with their tax obligations, they are likely to start reporting increased business expenses to offset that income, and so must the next piece of the puzzle for platform-based work refreshes an emphasis on education on how you can take these cuts properly.

Once an information statement is fully established under the new law, it can be expected that the administrative focus will shift to ensuring that taxpayer expense claims are correct.