IRS

The Gig Economy – Another Problem for the IRS

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.”

VKM

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Tax Policy

Analysis of Trump Tax Plan versus Clinton Tax Plan – One Day Shelf Life

This quick analysis is subject to change and is possibly accurate as of August 15, 2016.  If there is anything wrong with it, there are a few possible reasons.  For example, the blog may have been misstated by the “disgusting and corrupt media.”  Alternatively, somebody – probably Russian operatives – may have hacked my email account and intentionally created errors in this posting.  In any case, it may not be accurate at the time you read this blog because one or both of the candidates may have changed his and/or her proposals sometime today or tomorrow or soon thereafter.

First, let’s start with Mrs. Clinton’s tax policy proposals.  They have been pretty consistent for the last several months.  In summary, they are, for the most part, warmed-over Obama proposals.  President Obama has proposed many of these tax changes for years.  A Republican Congress or a divided Congress has pretty much stymied his changes.  One major exception – ObamaCare.

Mr. Trump’s proposals are pretty radical.  After reviewing his tax plans as of 8:00 a.m. CDT today, I conclude that his policies will help the little guy some and rich guys like Donald Trump a lot.  If you want the details, I’ll be glad to chat over a cup of coffee.

On a macro level, what is the difference to the U.S. Treasury between the Clinton plan and the Trump plan?  Most analysts say that Clinton’s plan would raise taxes about $1 trillion over a 10-year period.  Independent experts calculated that Trump’s first tax proposal would cost the U.S. Treasury $10 trillion over 10 years.  His people say that his newest plan, a few days old, only cuts taxes $3 trillion over 10 years.  It looks like independent analysts have not had time yet to opine on that number.  As you might guess, there is some concern about how basic government functions would be funded under the Trump plan.

What are my thoughts? I don’t think that either plan will move forward intact or in a form significantly resembling either of these original proposals.  Reforms will be more incremental.  Too many oxen are being gored; too many lobbyists are employed in Washington.  I’ll double down on my bet, if the House of Representatives, the Senate and the Presidency are not controlled by the same party.

VKM

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Guest Blog Post

How Would You Like to Win a BRAND NEW… Tax Bracket?

Carrie Reese, CPA, guest blogs today while I am lounging in Northern Michigan on the shores of Grand Traverse Bay.  Carrie is a valued member of our tax department, an up-and-coming leader in the Dallas Society of CPAs, and a new mom.  She’s pretty funny, too.

Earlier this year (two days after the tax deadline to be exact) I gave birth to our first child, and thus began a short stage in life where I was very busy, yet had a lot of free time. Yes, many nights of sleep were far too short, and doctor’s appointments aplenty, but I also found myself sitting around the house a large portion of the day. If my history tells us anything, it’s that I like to fill those gaps with game shows! A part of our new morning routine was sitting down to watch The Price is Right (TPIR). Just because I was on maternity leave didn’t mean I still didn’t think about taxes! All that ran through my mind as the poor college student celebrated winning a new car, a trip to Spain, and a new washer/ dryer set was, How on earth is that kid going to pay the taxes?

I would imagine that most people applying for and participating in a game show have no idea the tax implications of that windfall of prizes they’re trying so hard to win. As the bells ding and the confetti flies, accountants on staff are hurriedly preparing the paperwork backstage, waiting for the cameras to stop rolling.

With TPIR and many other shows, you may decline to accept the prizes, but a cash payout is not an option. If you choose to go home with your prizes, you are responsible for federal and state taxes in the state the show is filmed. You must pay taxes on the MSRP, not necessarily the discounted price on the open market.

If you win in the state of California (where TPIR is filmed), you must file and pay California state income tax, which happens to have the highest individual state income tax rate at 13.3%. In the case of TPIR, you must pay the California state income tax at the game show studio before the prizes are ‘released’!

This can be a tall order for someone who has just won $35,000 in prizes but no actual cash. Many contestants decline their prizes simply because they cannot afford to pay the taxes.

I suppose the takeaway is that it’s a much smarter tax move to play a game show that awards only cash.  However, you do have to remember to take some of that cash and pay your taxes.  Just ask Richard Hatch, the winner on the first season of the TV reality series Survivor.  He  received $1,000,000 in cash for his triumph.  Because he did not pay Federal income tax on his $1,000,000 of winnings and other income in excess of $300,000, he was an involuntary guest of the Federal government twice for a total of 60 months.

CJR