Today, the IRS released on its website a “Sharing Economy Tax Center” (“SETC”). The IRS cautions therein that if you receive income from a sharing economy activity, you’ve got income that should be reported on your tax return and that may result in taxable income, after taking into account allowable deductions and exemptions. The SETC also discusses a number of tax topics that may affect someone participating in the sharing economy. The IRS goes on to emphasize that income received from gig activity is income, whether or not you get an information form of which the IRS gets a copy. The 1099 series and the W-2 form are examples of those information forms. Why is the IRS addressing this issue now? Because pretty sizable dollars are at stake.
Fortune published an article on May 24, 2016 entitled “The Gig Economy Could Cost the IRS Billions of Tax Dollars.” The article cited a recent study estimating that more than two-thirds of the 2.5 million people who earned money from gig economy jobs in 2014 don’t earn enough to have their income reported to the IRS.
The article points out that this reporting gap is exacerbated by the fact that beginning in 2008, a Form 1099-K has been used as the information statement filed with the IRS to report credit card payments. The likes of Airbnb, Lyft, and Etsy don’t have to file Form 1099-K for persons who receive credit card and third party network payments (such as PayPal), unless the independent contractor driver, home/room renter, or seller during the year received more than $20,000 or entered into more than 200 transactions. Most sharing economy participants fall below those limits. At the time of the article, many sharing economy companies argued that 1099-K was the only information reporting form they had to file for their giggers.
The article rightly did not include Uber in that list. According to its website, Uber sends to drivers Forms 1099-MISC if the driver earned more than $600 and a 1099-K if the driver earned more than $20,000 or had more than 200 transactions.
What’s the impact on the U.S. Treasury? Probably a lot of money, but not enough to move the needle on the overall Federal budget. Suppose that subject two-thirds of 2.5 million people were non-reporters, earned income of $10,000 each, had no expenses to deduct and would have paid 30% in income and self-employment tax (the latter tax not always applicable). I calculate the amount of tax not paid to be about $5 billion. However, if properly documented deductions and exemptions are considered, that tax number probably would be significantly lower.
So we are looking at less than 1% of the nation’s annual approximately $450-plus billion “tax gap” – taxes not collected because of taxpayer noncompliance. Oh well, as the late Senator Everett Dirksen is said to have said: “A billion here, a billion there, pretty soon, you’re talking real money.”