Caroline Bruckner is the managing director of the Kogod Tax Policy Center at the Kogod School of Business at American University in Washington, DC. She is actively-engaged in consulting with Congress on tax policy and in 2016 published the study Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy.
Sovos spoke in 2018 with Professor Bruckner about tax policy and tax reporting in the sharing economy, sometimes referred to as the gig economy. She addressed the controversy surrounding 1099-MISC vs. 1099-K tax reporting. She spoke with Sovos again recently, this time addressing new developments in 1099-K policy and the confusion around a new California law that could recategorize many gig workers as employees rather than contractors.
Sovos: For a few years now, there has been a lot of talk about the reporting threshold for the 1099-K, which third-party settlement organizations use to report payments to workers. It’s still $20,000 and 200 transactions in a year, although the vast majority of gig-economy workers don’t come close to meeting it. Workers who don’t receive a Form 1099 are far less likely to report their income despite a legal obligation to do so. Is there any movement at the federal level toward changing the threshold?
Caroline Bruckner: I’m not sure I see any legislative movement right now – although there are bills in Congress to address these issues. What may change the status quo is that the Government Accountability Office is putting together a major report on the tax compliance issues of the gig economy. This new report will come on the heels of a 2019 TIGTA report showing billions of taxable revenue that is misreported by gig workers. When that GAO report comes out, it’s likely to prompt more movement on these issues.
I’m hopeful that the GAO report will generate enough interest for additional hearing on Capitol Hill or interest in addressing these issues. In the meantime, the IRS is really trying to reach gig workers to help them understand and comply with their tax obligations. For example, it introduced a new withholding calculator for gig workers. This is the second time the IRS has tried to reach these workers. In 2016, IRS launched the Sharing Economy Tax Center, and now this new calculator, which is available as a mobile app. Most gig workers connect with their work through their phones so having IRS resources accessible through smartphones is super important.
Sovos: The gig tax gap is costing the Treasury billions of dollars a year. Why would Congress not want to work more urgently to fill that gap?
Bruckner: To be quite frank, the public and policy makers in particular only have a certain amount of appetite to deal with tax issues. In 2017, Republicans came together and passed major tax reform, which costs taxpayers almost $2 trillion. Fixing a tax reporting issue that is only costing $5-$6 billion in lost revenue is not going to grab their attention when they have constituents demanding they focus on major issues such as immigration and infrastructure.
Also, members of Congress know that increased reporting requirements can cause problems. In fact, Congress has tried to legislate increased reporting in recent years and those efforts have been routinely beat back. Small businesses, which are an important constituency, threw a fit over the administrative burden that would have been required for additional information reporting in 2011. Today, we do everything through our phones. Complaints about administrative burdens are less credible now, but legislators remain scarred. There’s a lingering hesitation by some members to change information reporting requirements.
Sovos: So, who is the real loser here, other than the Treasury, if most gig workers don’t pay taxes as they should?
Bruckner: In many cases, the low- and moderate-income workers are driving gig economy. They have no retirement plan in place other than Social Security, and because they are misreporting their self-employment taxes, they’re underpaying on their own Social Security. They’re the ones really at risk. On a more granular level, the folks earning supplemental income doing gig economy work are likely to underreport their income and are not getting credited for quarterly contributions to Social Security because they’re not contributing. It’s undermining their ability to get benefits when they retire. You’re not paying into the system; you’re not getting credited for income you earned and the taxes you paid on that income, so you’re undermining your own benefits on the way out.
For some of those workers, it’s a cash flow issue. Also, they don’t even realize they owe self-employment taxes on this income. Many of these workers cycle in and out of doing gig work over the course of a year. When it comes tax time, they don’t remember how much they earned. It’s a common mistake taxpayers make. The first time I worked as an independent contractor while in graduate school, I had no idea I had to pay self-employment taxes or estimated tax payments. I learned the hard way. Not getting a 1099-K makes the problem so much worse for taxpayers.
But even those taxpayers who are aware of their tax obligations – and working to do the right thing aren’t guaranteed a 1099-K. Last month, I stayed in an Airbnb in California. The host made $40,000 last year renting a basement to guests, but never got close to that 200 transaction threshold and didn’t get any kind of 1099. That’s ridiculous.
Sovos: You brought up California. With AB5, which California just signed into law, the state is taking a different approach to classifying workers by recategorizing gig workers as employees rather than contractors and avoiding the threshold argument to some extent, at least for those workers who are reclassified. What does this mean for 1099 reporting?
Bruckner: It’s palatable how much this change has brought 1099 reporting issues to the forefront. Once California and New York make a decision on what they’re going to do on these fronts, the other states will follow. For many, changing the reporting thresholds for 1099 reporting becomes more urgent. The common law test in California for whether a worker is a contractor or employee has been simplified, and there’s a presumption that gig workers are employees unless you’re one of the categories of exceptions in the legislation or unless you can show you’re not.
This is far from a settled matter. This is just the start. Uber has publicly-stated its going to file the 1099-K and is going to fight the employee classification. Even if Uber wins that fight, you’re still going to be left with thresholds that are too high that are missing the majority of workers. This is why states like Massachusetts and Vermont have lowered their thresholds for the 1099-K to the threshold for the 1099-MISC with nonemployee compensation, $600 earned in a year with no minimum number of transactions. It’s a revenue driver for the states. It’s what the federal government should do as well.
Educate yourself. Empower your business. Engage with your community. Register now for GCS Intelligent Reporting Summit San Antonio!