Gig workers historically face ‘great challenges’ in complying with tax obligations: Professor

Caroline Bruckner, Kogod School of Business at American University Professor joins Yahoo Finance’s On The Move to address how the gig economy is faring and what tax implications gig workers are facing over the coronavirus outbreak.

Video Transcript

ADAM SHAPIRO: We're also watching what's happening to gig economy employees in the COVID-19 pandemic. And to help us understand some of the tax implications for gig workers, joining us from the Kogod School of Business at American University is Professor Caroline Bruckner. It's good to have you here and thank you for joining us.

A lot of people may not realize, one, that gig economy workers, some are still struggling to get any kind of unemployment benefits. But if they do get them, they're taxable.

CAROLINE BRUCKNER: Absolutely, unemployment benefits are considered partly [INAUDIBLE] for lost wages. So just like your earnings or wages would be taxable, unemployment benefits are taxable as well.

ADAM SHAPIRO: So what does a gig economy worker do?

CAROLINE BRUCKNER: So, first of all, a gig economy worker is likely going to have to find other means to supplement their income. Many of them, because they tend to be lower-wage workers, hopefully, qualify for the stimulus payments that were part of the CARES Act in 2020. And that is, of course, a refundable tax credit. And the IRS has been doing a fairly good job of mailing out those checks and doing electronic deposits for that emergency relief funding.

- So Caroline, what do these gig economy workers need to be aware of, not just with the various government subsidies that they can apply for, but also with the push backs back tax deadline? What they need to be doing on that front?

CAROLINE BRUCKNER: So gig economy workers, historically, have great challenges in complying with their tax obligations. And that's due in part because most of them don't get any information reporting forms if they work with a platform. The platforms aren't required to send forms to their workers, unless those workers have 200 transactions and $20,000.

This creates a big mess when it comes to tax time because most gig workers tend to cycle in and out of doing this kind of work. And often they forget that they even earned what little bit of income that they did over the year in doing that kind of work. So they need to keep track of their income and their expenses. That's the first thing they need to do.

Second, they need to pay attention that the tax deadline has been moved from April 15th to July 15th. But that also, for those workers that are gonna have more than $1,000 of income tax or self employment tax owed, those folks need to pay attention to what the requirements are for quarterly-estimated payments, which are a prepayment on their tax obligations, because platforms don't withhold and remit their taxes like they would for employees.

JARED BLIKRE: Jared Blikre here, we've seen the status of gig workers kind of change in certain states. California passed a law requiring a lot of gig workers to be onboard or at least treated with respect to benefits like full-time employees. When these changes occur, how does that affect their tax status and I guess their necessity of paying taxes even on those benefits?

CAROLINE BRUCKNER: So the number one thing you need to keep in mind is that the difference between a gig worker, who is an informal worker or typically treated as self-employed or an independent contractor, they don't have taxes withheld and paid over to the IRS in prepayment of their tax liability. They have to track that on their own and make in, usually, quarterly-estimated payments.

Now, employees work with their employers to pay both down payments on their tax liability in the form of advance payments and withholding on both income and payroll tax liabilities. So for tax purposes, your employer is responsible for collecting and withholding your tax obligation. Whereas, independent contractors, they've got to do it all on their own.

Now with California, things are certainly in flux. Just earlier this month, the California attorney general filed suit to enforce their new laws saying that, Uber drivers and Lyft drivers were in fact employees. Which is gonna be a major change for how Uber and Lyft have treated their workers so far.

ADAM SHAPIRO: Professor I don't advocate people breaking the law. And there are ramifications, whether it's health benefits or social security down the road, if you don't pay your taxes, but among the gig worker, independent contractors, any kind of statistic as to how many just do it under the table, don't report the income, and the rate of prosecution say, from the IRS and the government coming after them?

CAROLINE BRUCKNER: So the IRS has done a good job of trying to get a handle on those numbers. And we know that, according to the IRS tax-gap statistics, which is the difference between taxes actually imposed and what's actually collected, that when there's no information reporting-- meaning you don't get a 1099 or any kind of withholding-- that there's a 60% chance that workers are going to underreport or not report at all the income that they earned from doing this kind of work.

Now what's different is when you think about platform workers, all of that's electronic and in theory should be traceable. But the reality is that the majority of folks that do this kind of informal gig work, they don't necessarily do it through a platform. They find these jobs on their own through informal networks. And what gets lost there or not tracked by tax authorities and reporting is a much greater amount than what the IRS has been able to determine is getting missed by the platforms.

- Caroline, you talked about the benefits that now need to be in place, at least in a place like California, but we've seen a lot of these gig workers, especially on these apps, organize increasingly during this quarantine period-- asking for more protection, asking for higher wages. Now that we have seen how essential they are, do you think they're going to make a dent? Are they moving the needle in that broader conversation right now?

CAROLINE BRUCKNER: Absolutely, just the very fact that benefits for self-employed workers were included in the CARES Act specifically with respect to unemployment, is a sea change. I worked in the Senate during the economic crisis of 2008 and 2009, and self-employed gig workers weren't even on anyone's radar. The fact that they were front and center as part of that COVID response in March and continue to be a big part of that conversation now, is a huge change for how policymakers are thinking about these workers.

ADAM SHAPIRO: Caroline Bruckner is a Kogod School of Business at American University professor. We appreciate your being here, On the Move. All the best to you.