The gig economy, sharing economy, access economy — whatever you call it — has changed the way millions of Americans work.
It’s made up of people who work or provide services or goods on-demand, often through a digital platform. It includes everyone from ride-share drivers for companies like Uber (UBER) and Lyft (LYFT) to people who sell products on Etsy (ETSY) or eBay (EBAY) to traditional freelancers who work on an hourly, per day or contractual basis.
“Although the gig economy is not the biggest part of our labor economy by any stretch, it's one of the fastest-growing sectors of our labor economy,” says Caroline Bruckner, who is on the faculty of the Kogod School of Business at American University and managing director of the nonpartisan Kogod Tax Policy Center. “And more and more people are turning to these kinds of side hustles, as mediated by these platforms.”
The problem is, Bruckner says, when tax season rolls around many are not prepared because of a tax loophole: Their company doesn’t provide them with documentation of their work and income through a 1099 form.
Tax law states that companies have to provide a 1099-MISC if they pay a worker more than $600 annually. Most traditional freelance workers get those. But digital platforms typically use 1099-K forms, and they have different thresholds.
“Current tax rules don't require platforms that process payments for sellers and service providers that connect with customers through those digital platforms to give any kind of information reporting...until they have 200 transactions and $20,000 in payments.“ Bruckner says.
Not many ride-sharing drivers, delivery workers or home rental hosts reach that level.
“Most folks that do gig economy work, they do it as a supplemental source of income and come nowhere close to meeting that threshold,” Bruckner points out.
So that puts the onus on these workers to report quarterly estimated taxes to the Internal Revenue Service.
“They have to, on their own initiative, keep really good records of how much they earn and how many expenses they pay in order to track those earnings,” says Bruckner.
It’s not just about paying income taxes on these earnings. Once gig workers earn more than $400, they owe something else called self-employment tax. It is basically Social Security and Medicare taxes on this income.
Bruckner says it’s not really the income taxes that get people into trouble; it’s usually that they don’t know that they have to pay self-employment tax.
Congress is aware of this issue, and there have been multiple bills introduced in both the U.S. House of Representatives and the Senate. “They're still debating on what the best approach is to deal with this loophole,” Bruckner says.
Some states like Vermont and Massachusetts, according to Bruckner, aren’t waiting around for Congress to act and have passed their own legislation to lower requirements for 1099s.
Brucker’s tip for gig economy workers: Keep all records and track your expenses. She also suggests checking out the IRS’s gig economy tax site for freelance workers which provides advice and examples as well as tax forms to help prepare for the April 15 tax deadline.
Joanna Campione is a producer with Yahoo Finance