Gig economy tax and income reporting

Tax and Income Reporting Issues in the Gig Economy

In the context of today’s fast-growing “gig economy,” where an internet platform or app can facilitate consumer transactions and payments, it is easier for people to offer unique services, like food delivery, ride sharing, home repair, and cleaning with just a few swipes of their fingertips. Generally, the service providers in these transactions should receive a Form 1099-K by January 31 of each year if, in the prior calendar year, they received payments from either: (1) payment card transactions; or (2) in settlement of third-party payment network transactions above the minimum reporting thresholds of $20,000 AND more than 200 transactions.

However, the minimum reporting thresholds for filing the Form 1099-K regarding payments settled through a third-party network has created an opportunity for non-reporting. For example, a service provider getting paid through third-party payment network transactions can simply avoid meeting either the 200 transaction threshold or the $20,000 threshold and thus receive neither a Form 1099-K from the payment settlement entity nor a Form 1099-MISC.

The New Economy Works to Guarantee Independence and Growth Act of 2017, or the “NEW GIG Act of 2017,” was introduced in July 2017 by U.S. Sen. John Thune to address the classification of workers as either independent contractors or employees. It creates a safe harbor for the classification of workers as independent contractors where the workers meet a set of objective tests that would qualify them as independent contractors, both for income and employment tax purposes. You can read the full text of the bill here.

Notably, however, this bill would also revise the income reporting rules in the gig economy. Under the proposed bill, a payor would be required to report payments over $1,000 on IRS Form 1099-K, with the option of reporting amounts below that threshold. To qualify for the safe harbor, the bill would require the service recipient (or the payor in a gig-economy model) to withhold five percent of the service provider’s compensation, which would be deposited with the IRS, and treated like an estimated tax payment by the service provider.

The legislative purpose of 1099-K is to use third party information reporting to increase taxpayer compliance and improve IRS tax assessment. The new 1099-K reporting requirement of the NEW GIG Act of 2017 would specifically increase independent contractor compliance, which is currently lacking in the so-called “1099 economy.” As a result, Thune’s legislative proposal is available as an option to both facilitate the fast-growing “gig economy” with its safe harbor for independent contractors while also increasing taxpayer compliance.

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