California AB5 Gig Economy Bill Will Affect Tax Reporting, But How?

This blog was last updated on September 14, 2021

California Governor Gavin Newsom is poised to sign into law a bill that would recategorize gig economy workers such as ride-share drivers from being independent workers to full-time employees. 

The bill, California AB5, could have a profound impact on tax withholding and information reporting at state levels, with other states closely monitoring California’s activity. It could even spark change at the federal level. Just what that impact will be, however, is not yet clear.

California AB5 and Form 1099-K

Third-party settlement organizations (TPSOs) currently use Form 1099-K to report payments to service workers. It’s not clear at this point whether California TPSOs would still use the 1099-K to report payments to workers if the workers were reclassified as full-time employees. It’s also not clear how the state will square its reporting requirements with federal reporting requirements for gig workers, which do not align with those established in California AB5. 

The Form 1099-K itself comes with a pretty large catch. The IRS only requires TPSOs to use the form to report income for workers who meet a threshold of $20,000 earned and 200 transactions or more completed in a year. That high threshold disqualifies the majority of gig workers from receiving a 1099, and according to recent reports costs the federal treasury billions of dollars annually. 

Some states, such as Vermont and Massachusetts, have lowered the Form 1099-K threshold to $600 with no minimum number of transactions, which is in line with other non-employee compensation that is currently reported on Form 1099-MISC in Box 7 (and soon to be reported on the Form 1099-NEC). Concerns over the Form 1099-K threshold were also one factor that led to the creation of a new federal gig-economy bill currently sitting in a House committee. 

The ABC test within California AB5 

Legal challenges will almost certainly come into play with the new law after it takes effect. California AB5 established an ABC test to determine whether a worker is an employee or an independent contractor. The bill evaluates worker status on three points:

(a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and 

(b) that the worker performs work that is outside the usual course of the hiring entity’s business; and 

(c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

A company can classify any worker who satisfies all three requirements as a contractor rather than an employee in California.

Simple enough, right? Not really. Gig companies, many of which vehemently opposed AB5, have pledged to continue to challenge the bill even once it is signed into law.  As a matter of fact, Uber, Lyft and DoorDash pledged millions of dollars this week towards funding a ballot referendum: “We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers and riders want and need,” Lyft said in a statement.  

Gig economy tax reporting and a new federal bill

Then there is a potential conflict with the bill at the federal level that is still in committee, the New Gig Act of 2019. The New Gig Act has established its own ABC test, and as currently written indicates a worker is a contractor if:

(a) the relationship between the parties (i.e., the provider incurs expenses; does not work exclusively for a single recipient; performs the service for a particular amount of time, to achieve a specific result, or to complete a specific task; or is a sales person compensated primarily on a commission basis);

(b) the place of business or ownership of the equipment (i.e., the provider has a principal place of business, does not work primarily at the recipient’s place of business, and provides tools or supplies); and

(c) the performance of the services under a written contract that meets certain requirements (i.e., specifies that the provider is not an employee, the recipient will satisfy withholding and reporting requirements, and that the provider is responsible for taxes on the compensation).

There is no way to know at this point whether this language will be present in the final bill or whether the bill will even escape committee. 

No conclusions to draw on gig 1099 reporting … yet

With one bill soon to be signed and the other still working through the system, the situation with tax reporting for gig workers in California is in a state of flux. For now, all gig companies can do is wait for clarification from both state and federal officials on how to carry out tax reporting for gig workers.