Do Gig Economy Workers Need (Deserve) Special Tax Treatment?

 

Yes, the headline asks two very different questions. I will weigh in on this new and developing topic in today’s blog post. My post was prompted by the numerous articles setting forth five, or 10, things a gig worker should do at tax time, and pulling at that string just a bit. The IRS’ recent announcement regarding the delay of the 1099-k rules for third-party payors such as Venmo also pushed me in that direction.  This is something that’s been brewing since the advent of smart phones and apps/platforms that allow for gig workers to find work.

For your consideration:

“That Seems About Right,” Says Soon-To-Be-Audited Man

CAMDEN, MN—While filling out a 1040 form and other documents Tuesday in preparation for filing his 2012 federal tax returns, local man Robert Moran, a blog writer who will shortly be audited by the Internal Revenue Service, announced that his calculations seem to all add up fine. “Well, I’m self-employed and work mostly from the kitchen, which takes up about a third of my apartment, so that means I can deduct about $6,000 for rent plus all the repairs to the sink and refrigerator, and, yeah, that seems more or less right,” reported the man who will soon be audited by the IRS on suspicion of tax fraud and found to owe the federal government over $14,000 in unpaid taxes in addition to interest and a 20 percent penalty for disallowed deductions. “Plus I had to buy a TV and a DVD player to watch all the shows I blog about, which is another $1,500, and an iPhone that runs about $60 per month. Good thing you’re allowed to write off these business expenses.” At press time, Moran was telling himself that the IRS doesn’t look closely at people like him.  TheOnion, published April 2, 2013.

This piece of satire captures the level of tax sophistication that many tax professionals imagine the average gig worker possess.

Let’s review a couple of things here. First, I won’t try and blur the line between employee/small business owner/independent contractor/gig worker any further. For my purposes here, a gig worker is that person who has a main job, either as an employee or an independent contractor, and second (or third) job of a temporary nature. Think Uber driver, but just as well could be any kind of free lancer who is paid on for their work by the job. Their work is too irregular to be considered a small business and less informal than an independent contractor. Second, the number of gig workers is increasing. Here are some interesting things I learned via Statista regarding the Gig Economy

•  The median weekly income of male gig economy workers is $653.
• The number of freelancers in the economy is over 57 million.
• They work 11 to 30 hours a week.

Professor Shuyi Oei, The David T. Zhang Professor of Law at the Dule University School of Law, writing in the NationalTaxpayer Advocate Service Blog, November, 2017 states that a healthy percentage of workers in the “sharing economy” – 85 percent – earn less than $500 per month.

 With this backdrop, Professor Oei advocates for more taxpayer education for gig workers. She writes that taxpayers, for the most part want to comply, but do not know the tax ins and out of owning a small business.

Anecdotally, this was borne out in an interview I had with “Andy”. Andy is a full-time employee of the orange home improvement store. He occasionally works for individuals, small business owners and larger contracts. Most of the gigs are paid in cash, with no 1099 issued. However, a few are paid by check and with a 1099 issued. Andy’s experience matches that written by Professor Oei – he wants to be compliant but he just doesn’t know what to do the 1099 or how to figure his expenses. Confusion leads to inaction, which leads to more confusion. Andy decides to leave out several 1099s and he becomes one of the many gig workers who wanted to comply but ends up w in IRS collections. That presents its own set of problems and it takes Andy several years and months of wage garnishment to pay off the IRS.

My view is that we’ve seen a massive re-set in the manner which workers make their living, where they are employed and what they do to take care of their everyday lives. This is a result of a confluence of unanticipated events having unanticipated results. No, we won’t have flying cars like futurists predicted in the 50’s and 60’s, but who would have ever anticipated that workers could work from home in the numbers required to curb COVID, and who did so with more productivity? Better technology, a better work-life balance, and better productivity. This is not something that could have happened as recently as the early 2000’s, with the success rate we’ve experienced. And so many collateral social benefits – reduced commuting lowers carbon emissions and thus lowers the demand for gas, lowering its price. This alone may be a factor of delaying the need for road expansion for several years. Employers were finding that their entire office structure was suddenly out of date - do law firms really need that large library with so much square footage at exorbitant rates and pass-through charges? No more need for individual offices, just shared office space, and much less of it.

COVID and technology presents the country with a new paradigm (I hate to use such an over used expression, but it fits here). With that change comes an opportunity for Congress to modernize the tax code to fit the new paradigm and increase compliance and efficiency at the same time.

 

Back to my original questions – Do gig workers deserve a tax break? Do they need a tax break?

My answer to both questions is yes.

Gig Workers Deserve a Break

Gig workers deserve a tax break because they are not on equal footing with full-time employees who perform similar work. Gig workers need a tax break because this is a rare opportunity for tax policy to catch up to the paradigm change, and make it work for the benefit of all taxpayers. Again keep mind how this sector of the economy is growing. Diane Mulcahy, writing in Harvard Business Review address this aspect in her article “How US Law Needs to Change to Support the Self-Employed and Gig Economy”, July23, 2018.

She advocates for the elimination of the self-employment tax, the extension of health insurance tax policy benefits, and the extension of workplace protections afforded to employees but not gig workers.  

I do agree with Ms. Mulchay’s suggestion to expand tax breaks to gig workers who pay for their own health insurance. Since they are employee/employer,  why not get the same break as employers? I would extend the break to those workers who pay for their coverage via additional charges assessed by a spouse’s plan. These added costs are not cheap. It makes no economic difference to the gig worker if the cost of their plan comes from an added deduction on the spouse’s paycheck or out of the gig worker’s own account. Current tax law creates a huge economic disparity between the treatment of the employee and the gig worker. Allowing full deduction also promotes health care coverage, which in turn reduces the medical costs created by the uninsured and the under insured. I see this as a win-win for everyone.  

I don’t agree with the elimination of the self-employment tax. For me, that is my bridge too far in this process of transformation from employee to independent contractor to gig worker. The gig worker is both employee and employer and should bear the responsibility as other employers.

 

Gig Workers Need a Break

(Rather, the IRS Benefits if Gig Workers Get a Break)

Here, I follow the proposals of Kathleen Thomas, the George R. Ward Term Professor of Law at the University of North Carolina. See Taxing the Gig Economy, 166 University of Pennsylvania Law Review 1415 (2018).  See also Thomas, The Modern Case for Withholding, 53 UC Davis Law Review 81 (2019); Thomas, Taxing Nudges, 107 Virginia Law Review 571 (2021).

 There are also compliance benefits to tax refunds from the government’s perspective. Collecting taxes in advance will inevitably result in more taxes collected overall, as it will help some taxpayers overcome budgeting and liquidity issues. But beyond that benefit, numerous studies reveal that tax refunds actually result in more honest tax reporting, all other things being equal. This phenomenon is consistent with prospect theory, which generally predicts that individuals tend to be risk-seeking when facing a loss and they tend to be risk-averse when facing a gain. [emphasis added]. Thomas, Taxing the Gig Economy, 166 University of Pennsylvania Law Review 1415, 1440  (2018); quoting the work of Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 ECONMETRICA 263 (1979).  See also Daniel Kahneman, Thinking, Fast and Slow, 278 (2011).

 Professor Thomas’ proposals center on two basic concepts – (1) making tax compliance easier for the Gig Worker; and (2) easier compliance translates to increased tax collections for the IRS, in a more efficient manner.  Refer to our fictional blog writer, Robert Moran, above.

 Number one is accomplished via increased withholding at the source for gig workers. Cash payments, in any industry, are under reported. The increased use of third party payment platforms by everyone, including gig workers, provides a great opportunity to increase tax collections. This dovetails nicely with the increased reporting requirements for third-party platforms such as Venmo, set to go into effect for 2024 tax season. Parallel to increased collections is increased accuracy in tax expense reporting. See the italicized sentence above. Taxpayers are more likely to be compliant of they know they are getting a refund.

Many commentators argue that gig workers are inexperienced in accounting generally and tax documentation specifically. Additional taxpayer education is a central theme of many commentators writing on this topic.

Ms. Thomas’ second suggestion is for the implementation of s standard business deduction for gig works. Again, based on the theory that gig workers can not or do not want to get into the hassle of recordkeeping for expenses. This proposal is for the establishment of a specific percentage of gig worker’s gross receipts to be excluded from gross income. This idea has merit for some gig workers. For example, it may benefit gig workers who may less than say $20,000 a year via third party platforms. A standard deduction, paired with withholding at the payment source, is an attractive way to increase compliance and tax collections – the essential definition of Effective Tax Administration.

Nudging taxpayers into compliance by having an opt-out, rather than an opt-in election for both withholding and the standard business deduction would also encourage compliance. See Thomas,  Taxing Nudges, 107 Virginia Law Review 571 (2021).  See also Nudge, Richard Thaler and Cass R. Sunstein (2008).  This nudge successfully addresses the lack of experience of most gig workers.

 Granted, we will see much resistance to these types of proposals.  Good tax policy and the political will to make changes to the tax code is not likely to happen for some time, given the recent House bill to abolish the IRS. The IRS is under intense pressure to increase efficiency, which they should. However, increased efficiency and adapting to the radical change we are seeing in the workforce is going to take some time, political will, and money to allow the IRS to update their antiquated computer system. Right now, the county has none of these on-hand.  

For more information on Social Media Influencers, check out my post on US Tax Law as it applies to you.