The article ‘To help gig economy workers get ahead, simplify the tax filing process – Orange County Register’ by Garrett Watson [i] highlight the two issues facing workers in gig economy. The first is the classification or mis-classification of workers and the complexity of the American tax code.[ii]
Gig economy workers are classified as independent contractors. This means that these workers receive their gross earnings from gig economy platforms and are responsible for estimating, saving, and remitting their income tax liability themselves. On top of that, contractors must save and remit self-employment (SE) tax, which mirrors payroll taxes paid by employees and employers.
Many gig economy workers are not properly educated on their tax obligations, which may contribute to problems when they file taxes. For example, according to a Treasury study, 25 percent of workers were unaware that they must make quarterly estimated payments to the IRS.[iii]
Gig workers must properly track and deduct expenses from their gross income to determine tax owed. This can be complicated, as these workers must divide their expenses between business and personal use of an asset, such as a car or a spare room. The lack of worker tax preparation knowledge and the challenges they face related have created a tax gap between the amount of tax gig economy workers owe and the amount the IRS receives. American University economist Caroline Bruckner estimates that gig economy workers and independent contractors underpaid $4.9 billion in self-employment tax in tax year 2014.[iv]
Simplifying the tax process for gig economy workers would have spillover benefits for all taxpayers, who spent over 7.854 billion hours to comply with the tax code in tax year 2019. In 2019, an additional 169 million hours were freed up from the tiresome tax forms and associated record keeping as compared to 2018. On the other hand, higher out-of-pocket expenses on both individuals and businesses drove the net compliance burden cost up by $2.79 billion to $367 billion in 2019. To put the compliance burden into perspective, for every dollar project in January to be raised by corporate and individual income taxes in 2019, 18 cents is spent on compliance costs.
[i] https://www.ocregister.com/2019/11/13/to-help-gig-economy-workers-get-ahead-simplify-the-tax-filing-process/ . GARRETT WATSON, PUBLISHED: November 13, 2019 at 12:24 a.m.; UPDATED: November 13, 2019 at 12:24 a.m.
[ii] https://www.ntu.org/foundation/detail/tax-complexity-2020-compliance-burdens-ease-for-second-year-since-tax-reform
For example, small corporations are estimated to spend an average of 280 hours on taxes. In comparison, corporations with assets greater than $10 million take an average of 1,255 hours.
https://www.ntu.org/foundation/tax-page/tax-complexity-2019-modest-steps-toward-simplification
In total, the IRS currently has 199 individual income tax forms with a reported 2.647 billion annual burden hours, and 235 business tax return forms, with a 2.833 billion annual burden hours. Additional forms, schedules, worksheets, and burden hours are required for other parts of the Tax Code (which add more burden hours), including:
- Income Tax Returns for Estates and Trusts: 14 forms and worksheets, 376 million hours;
- Estate and Generation-Skipping Transfer Tax Returns: 24 forms and worksheets, 2 million hours;
- Income Tax Returns for S Corporation: 7 forms and worksheets, 889 million hours;
- Employer’s Quarterly Federal Tax Returns: 14 forms and worksheets, 388 million hours, and
- Short Form Returns of Organization Exempt from Income Tax: 8 forms and worksheets, 44 million hours.
[iii] In order to analyze compliance with self-employment tax requirements by taxpayers who earn
income in the gig economy, we identified a population of 3,779,329 individual taxpayers who received a Form 1099-K from at least one of the nine gig economy payers for Tax Yers 2012 through 2016. Therefore, to identify
individuals who did not report their Form 1099-K gross payments, we identified taxpayers who did not report income on a Schedule C and who did not report income on line 21. Our analysis revealed that 812,018 (25 percent) of the taxpayers who received a Form 1099-K and filed a Form 1040 tax return did not report income on either Schedule C or line 21. In addition, 427,043 (13 percent) did not file a Schedule SE and pay self-employment taxes.
https://www.treasury.gov/tigta/auditreports/2019reports/201930016_oa_highlights.html
[iv] https://www.american.edu/kogod/news/hidden-cost-hustle.cfm