To compete within this new gig economy and combat skills and worker shortages, Talent Acquisition professionals are using more top talent from non-traditional labor pools. HR managers have begun adopting more agile talent strategies by utilizing contingent workers, freelancers, independent contractors, Statement of Work (SOW), Corp-to-Corp (C2C), moonlighters, third-party consultants, self-employed, 1099ers, human cloud workers — whatever you call them, the “gig economy” is thriving.
In the last financial crisis, the landscape of American business changed dramatically. In the past, most working people wanted stability: a meaningful place to go during the day, a steady paycheck, and a sense of security. A lack of stability, aspirations to be their own boss, and desire for flexibility are what drive workers today. Millennial-focused professional online communities showcase what it means to be a self-employed young person. It turns out that the gig economy, as well as a prevalence of the side–hustle in younger professionals’ careers, is what is defining today’s freelancing economy.
If these self-employed taxpayers are used to traditional employment arrangements and are new to participating in the gig economy, they may be unaware of, or confused by, all the tax requirements for self-employed individuals. With low unemployment and a flourishing economy, we need to shine a spotlight on the self-employment tax compliance requirements that companies and workers must follow.
As the economic trend increases the number of self-employed taxpayers, it is important that the IRS provide accurate guidance and notices about self-employment tax obligations. The Treasury Inspector General for Tax Administration (TIGTA) report audit findings:1
The difference between what taxpayers owe and what they pay timely is referred to as the Tax Gap. The gross Tax Gap is the amount that is owed by taxpayers before collections from the Internal Revenue Service (IRS) enforcement actions and other late taxpayer payments are considered. IRS studies have shown that the self-employment tax underreporting portion of the Tax Gap has been growing since 2001. The IRS last estimated the self-employment portion of the annual Tax Gap at $69 billion between 2008-2010. The gig economy has since emerged and grown considerably, with thousands of new taxpayers each year being responsible for self‑employment taxes. The number of discrepancies involving Forms 1099-K in their 264,000 subject test cases of gig economy payers increased 237% from 2012 – 2015. Companies need to take these factors into consideration:
- Treasury Regulations do not require certain gig economy businesses to issue Form 1099-K unless workers earn at least $20,000 and engage in at least 200 transactions annually.
- Consequently, many taxpayers who earn income in the gig economy do not receive a Form 1099-K; therefore, their income is not reported to the IRS. When income is not reported to the IRS, taxpayers are more likely to be noncompliant.
TIGTA has recommended that the IRS take several corrective actions to improve how the IRS’s Automated Underreported (AUR) program addresses self-employment tax noncompliance, selects cases, and conducts quality reviews. TIGTA suggested that the IRS Office of Chief Counsel develop and issue guidance to help clarify current third-party reporting regulations and work with the Department of the Treasury Office of Tax Policy to pursue regulatory or legislative change to reduce the information reporting gap.TIGTA contends that the implementation of these recommendations would be in the best interest of improving taxpayer compliance.
The growing gig economy and the challenges it presents to tax compliance have been the subject of Congress’s attention for several years and were discussed at length in two congressional hearings in Calendar Year 2016.2 To help alleviate some of the confusion for taxpayers earning income in the gig economy who want to be compliant, the IRS has created the “Sharing Economy Tax Center” web page, which is designed to provide tax information related to a number of areas associated with the various gig economy platforms. 3
Self Employment Taxes
Self-employed workers are taxed differently from employees. Self-employed individuals (e.g., independent contractors) must pay self-employment tax. Gig workers need to take these factors into consideration when performing services:
- Filing Requirements
- Employee or Independent Contractor
- Tax Payments, Including Estimated Tax Payments
- Self-Employment Taxes
- Rules for Home Rentals
- Business Expenses
- Receiving Form 1099-K, Payment Card and Third-Party Network
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This blog article is for general information purposes only and does not provide an in-depth overview of tax laws. It should not be solely relied upon or substituted for tax, legal or professional advice. Employment categories and circumstances, along with detailed provisions of these laws, must be taken into consideration. Use of the information provided is at your own risk.