Legal & Compliance

Gig Economy Necessitates Spotlight on Self-Employment Tax Compliance

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.

Tax Gap

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:

Get the benefits of engaging with Independent Contractors without the potential risks. ClearPath Workforce Management risk mitigation services bridge the gap where fear of risk may prevent engagement of top talent in the gig economy. ClearPath, ClearIC™ has incorporated industry-leading technology to automate the IC compliance evaluation process, in a program managed by our experienced compliance specialists. It marries the efficiencies of an online system to collect data and documents with the knowledge and expertise to apply rationale to the data and documents collected. You get the best of both worlds: online access to a logical, easy–to–use system, and attention to detail as well as expertise. If your organization could use some assistance navigating worker classification and IC compliance, let the experts with ClearPath assist you. Request a complimentary review of your potential risk and exposure analysis from ClearPath.

Contact us to learn more about how our expert personalized service can let you get back to focusing on your business goals. Work with a leader in the industry for outsourced Human Resources and Payroll functions associated with W-2 and 1099 contingent workers. Let ClearPath be the path to your peace of mind.

 

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.

 

Source:

1https://www.treasury.gov/tigta/auditreports/2019reports/201930016_oa_highlights.html

2https://www.treasury.gov/tigta/auditreports/2019reports/201930016fr.pdf

3https://www.irs.gov/businesses/small-businesses-self-employed/sharing-economy-tax-center