A new study from the Kogod Tax Policy Center at American University, due to be presented to Congress Tuesday, finds 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, Bloomberg reports. And that could be a significant contributor to the nation’s tax gap, which the IRS estimates to be around $450 billion a year.
The study surveyed 40,000 members of the National Association of the Self Employed, and found that people who earned money in the gig economy were confused about how and if to report the earnings. The IRS attributes almost $200 billion of its annual tax gap to underreported individual business income.
The stumbling block to getting gig economy workers to report their income correctly is IRS form 1099-K. Up until 2008, independent contractors generally received 1099-MISC forms, which their clients had to file with the IRS whenever they paid a freelancer more $600 or more a year.
The 1099-K, which affects those who receive credit card and third party network payments—i.e. via services like PayPal and the like, which covers a huge chunk of gig economy workers—don’t have to be filed by clients, such as Airbnb, Lyft, and Etsy, unless the independent contract earned more than $20,000 or received more than 200 transactions. And most gig economy workers fall below those limits.
“These issues should be addressed—not only because millions of American taxpayers are needlessly burdened trying to comply with an antiquated, outdated tax system—but also because inaction has very real implications on Treasury and IRS’ ability to fairly and efficiently collect taxes,” the study says, according to Bloomberg. Caroline Bruckner, who wrote the report and is managing director of the Kogod Center, is scheduled to testify before the House Small Business Committee on Tuesday.
This has been an ongoing issue for several years. The study notes that the IRS was told two years ago that 1099-K issues meant that a lot of gig economy earnings were not being reported, Bloomberg notes. And a year ago, Bruckner and a colleague at the Kogod Center wrote a letter to the Senate Committee on Finance noting that the the 1099-K was created in 2008, long before the gig economy took off, and the 1099-MISC has been around—virtually unchanged—since 1954.
“The inadequacies of the current code and and tax administration do not just burden Emerging Entrepreneurs, there are also significant budget and compliance consequences,” they wrote.
Etsy, Lyft, and Airbnb inform their gig economy workers that they need to report their income even if they do not breach the $20,000/200 transaction threshold, Bloomberg reports, while Uber files a 1099-K for all its drivers.