Freelancers, self-employed people and gig economy workers have been confronting tax challenges this year that didn’t just end with tax season.
A new
Other app providers are also trying to help the freelancer and gig economy market. Bluecrew provides a “workforce-as-a-service” app for the W-2 workforce. According to Steven Johnson, Bluecrew’s chief people and compliance officer, many 1099 workers pursuing gig jobs make the mistake of viewing them as “tax-free,” leaving the worker in a worse financial position than a W-2 worker over the long term. The IRS may start to crack down more on gig workers after the American Rescue Plan Act of 2021 lowered the Form 1099-K reporting requirements from $20,000 in aggregate payments to only $600.
“There have been several changes requiring more detailed IRS reporting for any individual who earns $600 or more in payments as a means to crack down on the flow of money for 1099 workers across a whole host of electronic payment platforms and gig marketplaces,” said Johnson. “I believe this will create more problems for employers, especially small to midsized employers, as well as significant problems for the workers themselves. Many of the people who are working as 1099 contractors and having their wages reported have previously not had the financial savvy nor the tax expertise to navigate being a 1099 worker and the tax burdens that present themselves as 1099 independent contractors.”
He sees differences in the ways that gig workers operate compared to the traditional freelancer and self-employed business owner who may be more accustomed to paying quarterly estimated taxes.
“When you think about the history of 1099 work, it traditionally was used for professionals who had independent businesses and were offering services,” said Johnson. “They were truly operating as independent companies, like the independent professional architect, who had the financial and tax expertise, perhaps through their accountant, and they were managing their business as a for-profit business. Then you move into the next phase with the gig economy, with Uber, DoorDash, etc. Those gig providers, which are supplementing things like delivery services, ridesharing and taxis, essentially are providing some element of tools for tax expertise to their drivers. Those employees have expenses, like insurance and maintenance on the car. Uber, Lyft and DoorDash are educating their participants who participate in their marketplace at a rudimentary level.”
In April, the Independent Economy Council, a group of workers, advocates, entrepreneurs and researchers advocating on behalf of the self-employed, released a
“That’s nearly half of the independent workers surveyed were not even putting money aside,” said Trent Bigelow, one of the founding members of the council, and CEO of Abound, an application programming interface provider that helps businesses in the independent economy with self-employment tax calculations, quarterly tax payments, 1099 filings, tax documents, tax withholding and employee benefits. “They’re being set up to not succeed when they do go to file their taxes at the end of the year. That’s something gig workers should be doing, depending on what reporting threshold they’ve got.”
The survey also found that 46% of independent workers worry they’ll be audited, and 40% won’t be able to pay their taxes, while 63% are concerned they’ll owe more than they thought.
“They know they should be doing something about taxes,” said Bigelow. “Maybe some of them are filing, but the big concern is that many of them think they’ll get into trouble with the IRS. Over a third of our respondents believe they will not be able to meet their tax obligations, mainly because they don’t have the funds set aside, or they are spending the money that they realize later they owe to the IRS or to the state. People often find that the process of paying quarterly estimated taxes, and calculating and withholding as an independent worker is more confusing than it was when they were an employee.”
Most gig workers aren’t even aware they should be paying quarterly estimated taxes and could face big tax bills the following year. But their employers also could be facing tax problems down the road.
“Those are traditionally things that the light industrial retail worker never had to do before, and by participating in these gig marketplaces, now they’re assuming all of this risk,” said Johnson. “The small and medium-size companies that are now reporting differently are getting the benefit and flexibility of not having that person as a W-2 worker, yes, but also the compliance impact of not reporting significant numbers of 1099 workers that are misclassified is presenting them with their own downstream tax risk that they’re likely not taking into account.”
Most companies that use gig workers don’t bother to withhold payroll taxes for them. “When you’re a 1099 gig worker on these platforms, the workplace posts the job, they stipulate the rate that they are willing to pay, and then they pay above that a fee to the gig platform for posting their job,” said Johnson. “There is no withholding or anything else but the gig platform purports to facilitate the reporting of the income that’s paid to the individual, so the workplace does not share its burdens around payroll taxes, Social Security, Medicare and unemployment. It doesn’t even cover them under worker’s compensation, so the employee-level tax burden is not being accrued or accounted for by the workplace in the event that the worker is misclassified. It is also not being accounted for in the event the worker does have some type of injury or event.”
Most companies that use gig workers have a ready excuse. “The employer response to that is they’re not an employee and that then gets into the question of whether they were misclassified or not, and should they have been covered,” said Johnson. “The worker is then assuming all of those risks on their side. They’re assuming the full tax burden of not only their income tax but the full tax burden for Social Security, which as a W-2 worker is shared by the employer and employee. In the 1099 context, the Social Security tax burden is shared and assumed fully by the worker. Medicare taxes are assumed fully by the worker, and if not paid and accounted for properly, affect your ability to partake in Medicare and Social Security when you become eligible later in life and retire.”
Facing the IRS alone
Gig workers face the possibility of tax audits from the IRS, even though those have become rarer in recent years as the agency has experienced staffing shortages. But with so many audits now sparked by automated notices, gig workers could still find themselves at risk.
“They should be aware that the IRS is increasing the level of automation and enforcement on the information returns, the 1099s,” said Bigelow. “A couple of years back, many of these workers might not have been informed by the IRS that they owed taxes. The IRS is stepping up its efforts to inform taxpayers of the tax gap for unpaid taxes. They are more likely this year to hear from the IRS, to receive an automated letter from the IRS saying you owe something.”
The IRS is making it easier now, at least, to sign up for repayment plans. “We’re not talking about negotiating a lesser payment,” said Bigelow. “We’re just talking about being able to stretch out the repayments. The IRS is now offering a much better and easier experience online at IRS.gov where there is an online account to be able to do monthly repayments. That’s the good news.”
However, gig workers should try to avoid getting into that position in the first place. “It’s one thing to get onto a repayment plan for last year, but not to add another repayment process for this next year,” said Bigelow. “The way workers can do that is by working with financial professionals and using do-it-yourself software.”
The Independent Business Council is advocating for businesses to help gig workers opt into voluntary withholding at the point of payment. “What we are beginning to see is that some of the digital businesses that are paying out 1099 income are beginning to think about creating a compliant way to essentially allow these workers to voluntarily withhold on their own, either through their system or through a data connection to a third-party product,” said Bigelow. “That’s exciting because that may mean independent workers will be able to withhold in a way that feels a little bit like being an employee, but again legally keeping them as separate entities.”
However, some of the main players like Uber, Lyft, DoorDash, Instacart and TaskRabbit don’t appear to be doing that quite yet, although they may be providing some basic education and tools for tax compliance, as Johnson noted. Only the crafts seller site Etsy seems to be making any tentative moves so far.
“Etsy is providing tax suggestions and resources, although they’re not yet doing withholding,” said Bigelow. “To the best of my knowledge, today there aren’t any platforms that are helping these workers withhold directly, but there are many that are working on it. Today we see a lot of third-party software products like Catch, Lance, Moves and Everlance that are targeting gig workers or independent workers, but they’re not necessarily working directly with those platforms today. It’s not like a QuickBooks for the Self-Employed. Today that means workers need to know how to use the software to figure things out. We’re not seeing these products launched yet, but large platforms are beginning to develop them. Perhaps maybe next year we’ll be talking about the gig platforms that are actually offering voluntary withholding inside the product.”
