Gig Economy Leaving IRS Short on Tax Revenue

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By Michael Trimarchi

The explosion of the gig economy has proved to be a benefit for self-employed workers, but the IRS likely is coming up short on collecting tax payments from them, National Taxpayer Advocate Nina Olson said.

The gig economy, which includes shared-services companies such as Uber Technologies Inc., Lyft Inc., and TaskRabbit, brought many new people into self-employment, Olson said at the May meeting of the American Bar Association Section of Taxation. The result is that there likely is much more unreported income from workers, many of whom may not understand their income-reporting and payment obligations to the government.

A 2016 survey of members of the National Association of the Self-Employed found that 34 percent of gig workers said they didn’t know they have to file quarterly estimated tax payments, Olson said May 11. The survey also said that 36 percent of respondents said they didn’t understand what tax records must be kept and 43 percent didn’t set aside money to meet tax obligations or know how much they owed, said Olson, whose office is an independent organization within the Internal Revenue Service.

The language barrier also may be a hurdle for many workers, Olson said, given that the gig economy is an easy entry point for many immigrants. “We’re bringing lots of people into self-employment that we’ve never seen before,” she said. “The gig economy is a big draw.”

Outreach Needed

The IRS should become more engaged with such workers by helping them understand tax commitments through outreach programs. However, the agency is hampered by a budget that has been cut by 20 percent since 2010, which has reduced its workforce, Olson said. As a result, the IRS is less able to help new businesses—especially those in the gig economy—understand their rights and responsibilities under the 2017 tax act ( Pub. L. No. 115-97), such as paying estimated taxes, she said during April 17 testimony on Capitol Hill.

Many members of shared-services groups participate in online forums to discuss and share advice on tax-related questions, Olson said, noting that misinformation often circulates within the forums. Olson recommended that the IRS monitor such forums in order to address any misconceptions. In such cases, an IRS representative, along with a trusted member of the business community, could meet with workers to provide helpful information and alleviate concerns.

The IRS should consider developing short but comprehensive publications for the gig industry, Olson said. One-page brochures and programs that walk gig workers through processes such as estimating tax obligations, record keeping, and how to secure an employee identification number would be useful, she said. And it all should be electronic: “All these people are online,” she said.

Another solution might be for service companies to develop billing and collection programs for independent contractors, and, if authorized, submit estimated payments on their behalf as a vendor, said Russell A. Hollrah, an employment tax and employee-benefits partner at Hollrah LLC in Washington. This would be helpful because many independent contractors in the gig economy aren’t saving for tax payments, he said.

Hollrah agreed with Olson that tax payments made every three months is outmoded in an economy driven by the immediacy of online services. Gig workers should be allowed to make payments more frequently, especially because most aren’t saving the larger quarterly amounts required each quarter, he said.

“Let IRS authorize independent contractors to make estimated payments weekly, biweekly, however frequently that they might choose, but bring the client company outside that transaction,” Hollrah said. “Because once you drag the client company inside that transaction, it ends up having a discriminatory impact on the independent contractor, and it subjects the company to additional burdens and tends to erode the distinction between employees and independent contractors.”

To contact the reporter on this story: Michael Trimarchi in Washington at mtrimarchi@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

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