As many as one out of four people earning money by driving for Lyft or selling crafts on Etsy might not be reporting that income on their tax returns. That’s what an audit performed by the Treasury Inspector General for Tax Administration (TIGTA) found, according to a report released Feb. 14, 2019. TIGTA’s report, Expansion of the Gig Economy Warrants Focus on Improving Self-Employment Tax Compliance, describes the results of an audit performed over the 2012-2015 tax years at various IRS locations around the country.
Of the 3.8 million individuals the auditors identified who had received income from one of the gig work employment platforms and which was reported on Form 1099-K, Payment Card and Third Party Network Transactions, more than 800,000 did not report that income on their tax return. Even those who did report their self-employment income didn’t all get it right: 13 percent failed to self-assess and pay self-employment tax.
IRS and gig workers struggle to comply
This report also details the challenges the IRS has in enforcing compliance with the growing community of self-employed and gig workers. Due to IRS resource constraints, only about 15 percent of the individuals who had been flagged as potentially underreporting either total income or neglecting to pay self-employment tax were ultimately pursued. Over the four years of the audit, TIGTA inspectors found some $12 billion in Form 1099-K discrepancies that were not investigated at all.
A challenge for gig workers is that the income from employment on platforms such as Uber, TaskRabbit or Etsy is reported using Form 1099-K, Payment Card and Third-Party Network Transactions. The general rule from the IRS is that a 1099-K should be issued if aggregate payments exceed $20,000 and consist of more than 200 transactions.
However, the TIGTA report noted that IRS resources include conflicting guidance as to whether these thresholds apply to employment platforms. Consequently, some platforms voluntarily apply lower thresholds, but this leaves many gig workers confused about the amount of income they need to report on their tax returns.
Many incorrectly assume that if income is not reported to the IRS, it’s not taxable. And, as the TIGTA auditors found, many gig workers don’t even report income that is reported to the IRS.
The IRS has known about this issue for years. According to 2016 testimony of the national taxpayer advocate, Nina Olson, before the U.S. House of Representatives, as cited in the TIGTA report, many of these gig workers “may not have been aware of the consequences of being classified as a nonemployee and may not have set aside money for self-employment tax.”
The difference between a W-2 paycheck and a 1099 paycheck
When employees receive a W-2 paycheck, the entire amount is available to spend according to their needs and desires. But, as I discovered when I began freelancing, I can’t do that when I receive payments as an independent contractor. I need to set aside money to cover my business expenses, money to fund my retirement and money to pay my taxes. I am continually educating fellow writers about this difference.
The opportunity for advisors
This means advisors can take the lead by educating gig workers about their tax responsibilities. As the TIGTA audit showed, it’s not too likely that the IRS is going to educate them the painful way by auditing their return.
The thin profit margins for some gig workers makes efficiency essential when working with this group. Developing standard processes and procedures can make this profitable. A friend of mine runs a highly systematized offshore bookkeeping practice, and she talks to every Uber driver she rides with about their bookkeeping. Just doing this, she’s added quite a few Uber drivers to her practice.
While the stereotype of a gig worker is that they don’t make enough money to make it a profitable venture, this may not necessarily be the case. TIGTA auditors found several individuals with 1099-K income over $2 million who had discrepancies with their tax filings for all four years.
So, the next time you ride with Uber or get food delivered from GrubHub, take the time to ask that person about their tax filing and bookkeeping. You just might get a new client who needs your help!
Originally published in Firm of the Future Blog by Liz Farr, CPA
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