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2019 1099 Taxes

IRS Paying Closer Attention to Gig Economy Workers Than Ever

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According to a number of recent studies, the gig economy has evolved in a wide variety of interesting ways over the last few years. This is including a few which likely could not have been predicted at the start. As of 2018 about 34% of gig economy participants in the United States were full time. A full 84% of them are doing so exclusively. That number equals about 47.8 million people in the United States alone.

This comes during a time when not only are corporations and Fortune 500 companies frequently outsourcing non-core tasks to gig economy workers. 47% of Millennials have embraced the freelancing culture. Experts predict that by as soon as 2020 about 50% of the United States workforce will be freelancers.

Taxes, the IRS and the Gig Economy

In a traditional employee and employer relationship, an employer will withhold taxes from every paycheck for their employees. They will also make contributions to Social Security as well. When someone participates in the gig economy, this doesn’t happen. The worker is responsible for all tax-related matters, including various self employment tax and withholding requirements.

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Recently, the Treasury Inspector General for Tax Administration issued a report about the importance of self employment taxes as outlined by the IRS. The IRS has an Automated Underreporter system, also known as the AUR, designed to help identify participants in the gig economy with discrepancies. It is designed to look at what they report on their income tax returns and what payments they actually received throughout the year on various 1099-K forms.

In an examination of the tax years 2012 through 2015, the report identified more than 264,000 different cases with potentially underreported payments. The data revealed that this was actually a problem that was getting worse over time. Underreporting increased a staggering 237% over the course of those four years.

While the program identified 264,000 discrepancies, nearly 59% were not moved through the system for further analysis. This was due to the sheer volume of potential issues that were being examined. The remaining 2,800 people who had potentially underreported their income for all four of those years. That total represents about $2.7 billion in underreported payments alone.

Gig Economy Worker 1099 Filings
Source: Treasury.gov

 

A large part of this has to do with how payments are handled in the gig economy. If a gig economy worker is paid via PayPal, they must receive over $20,000 in a single calendar year AND do so via 200 or more transactions. If they don’t meet or exceed both of those thresholds, PayPal doesn’t issue a 1099-K. This means that their income isn’t being reported to the IRS at all.

According to that TIGTA report, whenever income is not reported to the IRS, taxpayers are far more likely to be noncompliant. This is true both accidentally and intentionally. The first scenario could still land someone in hot water by way of late fees and other penalties. The second is actually criminalized and is punishable by up to five years in a federal penitentiary for prison and a fine of up to $250,000.

It’s true that the IRS has no intention of jailing over 40% of the United States workforce. But at the same time, they want their money.

The Treasury Inspector General made a series of recommendations to the IRS about how to best handle this issue moving forward. One of the biggest involved the development of a strategic plan to address tax administration for the gig economy. That plan should also create increased visibility into the collection and assessment of self employment tax as well. A soft notice program was also recommended, aimed at gig economy workers with repeated noncompliance issues.

TIGTA also recommended a significant expansion of the AUR program to account for a wider array of taxpayer situations. This was including those who have a long history of high-dollar discrepancies. The IRS disagreed with this recommendation. Officials said that their current system was fine and that adding more scenarios would ultimately add minimal value to what it was already doing.

11 recommendations were provided throughout the report and the IRS agreed with all but two of them. This was interpreted to mean that as an organization they are aware that this is an issue and they’re searching for opportunities to do something about it moving forward.

Best Practices for Gig Economy Workers

All of this means that the IRS is absolutely going to pay closer attention to gig economy workers over the next few years in particular. Most people operating under this system will have absolutely nothing to worry about, even if accidental discrepancies are identified. For the best results, gig economy workers need to:

  • Keep the most detailed records possible.
  • Keep all receipts for expenses.
  • Keep track of your mileage especially if you do work for a company like Lyft or Uber.
  • Don’t try to do your taxes on your own if you are not capable of doing them properly.
  • Stay on top of quarterly estimated tax payments to avoid getting hit with a large tax bill at the end of the year.
  • Don’t forget about the self employment tax, which is an additional 15.3% tax on top of the income taxes you already owe.

These best practices will help make sure that gig economy workers have nothing to worry about. This is true even in the event of an IRS audit. They’ll be less likely to make mistakes in the first place. They can also prove that any that did occur were unintentional.

 

independent contractor at work 1099

Independent Contractor 101: The Benefits and Risks

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As you finish with your schooling and move into the world of work, you may be offered the opportunity to work as an independent contractor. With the advent of Lyft, Uber, Doordash, and other on demand services, these freelance positions have been increasing rapidly.

From the smallest startups to the largest multinational corporations, more and more companies are turning to independent contractors to complete projects, lead new divisions and augment their normal staffing. This can be a good deal for the business involved, but is it also a good deal for you?

The answer to that question will depend on a number of factors, from your personality and confidence level to your experience and financial situation. For the right individual, life as an independent contractor is far better than life as an employee. For others, the security of a full-time job is a much better fit. Before you make such an important decision, it is important to weigh the pros and cons of working as an independent contractor.

What is an Independent Contractor?

Being an independent contractor is much different than being and employee, and the distinction is an important one to understand. Independent contractors do not work for the company – they work for themselves. For one thing, instead of a W2 form with withholding, independent contractors receive a 1099 form.

Independent contractors are essentially business owners, even if they are not incorporated as such. They may work in the same offices as traditional employees, and even perform the same tasks, but independent contractors are classified much differently, with all the benefits and drawbacks that entails.

The Advantages of Working as an Independent Contractor

Working as an independent contractor has a number of built-in advantages, and the lifestyle can be very attractive. Here are some of the biggest potential advantages of working as an independent contractor.

  • Independence – The independent part of independent contractor is a very big deal, and for those who like to work on their own, a very attractive one.
  • Learning New Skills – The typical independent contractor may work at many different companies, learning about new industries and picking up new skills as they go. This ability to updates skills and learn new things is more important than ever before, and one of the biggest benefits of life as an independent contractor.
  • Contract Protection – The word contract is part of the independent contractor designation, and the protection that contract provides can be very valuable. Knowing what you are responsible for, and detailing the responsibilities of the other party, is a valuable form of protection, and one that most employees do not have.
  • No Tax Withholding – This one can be both a benefit and a drawback depending on your perspective and level of financial savvy. As an independent contractor, you will not be subject to tax withholding, so you will get 100% of what you earn. Keep in mind, however, that you still have to pay taxes – that part is covered in the next section.
  • Ownership – The chance to run your own business
  • No Micromanaging – Anyone who has ever tried to work with the boss hovering nearby will appreciate this one. When you work as an independent contractor, you can work at your own pace, and generally work with minimal guidance. You will still need to get the work done, but the hovering boss should not be a problem.

The Disadvantages of Working as an Independent Contractor

Working as an independent contractor can be an excellent fit for some, but it is not the solution for everyone. There are some significant drawbacks to life as an independent contractor, and those disadvantages are covered below.

  • Tax complications – Since withholding is not part of the picture for independent contractors, their tax situations can get pretty complex. As an independent contractor, you will be subject to the self-employment tax, and that could raise your overall tax bill. You will probably need to make estimated tax payments as well, so budgeting becomes even more important.
  • No built-in retirement savings – Many employees have access to company-sponsored retirement plans like 401(k) programs, but independent contractors need to make their own arrangements. There are retirement plans for independent contractors, but they can be complicated to set up.
  • No guaranteed income – When you work as an independent contractor, the amount you make is solely dependent on how much, and how smart, you work. If you are a hard worker and a shrewd negotiator, you can do very well indeed. If not, you may have trouble making ends meet. You will need to complete your current project, but you will also need to hustle for your next gig.
  • The cost of business supplies – Depending on when and where you work, you may have to pick up the cost of the supplies you use. When you work on-site, you will probably have access to basic office supplies, but when you work at home, you will need to provide those essentials for yourself. You can take a deduction for both your home office and your business supplies, but the up-front cost is entirely up to you.

Working as an independent contractor can be a great way to gain flexibility, update your skills and learn about different industries. At the same time, it can be a tax nightmare and a financial uncertainty. In the end, only you can decide if life as an independent contractor is the right choice for your future career.