Tucked in the new coronavirus relief package is a new requirement targeting Internet services and marketplaces like Uber, Etsy, and Airbnb. The goal: Ensure people are paying the taxes they owe by providing them adequate documentation.
The new rule, part of the $1.9 billion relief bill President Joe Biden signed on Thursday, requires companies to report workers income to the IRS if they make more than $600 a year. Previously, these companies only had to report workers’ incomes to the IRS if they made more than $20,000 a year or were paid more than 200 times. The new rule, which will take effect in 2022, is expected to generate up to $1 billion in additional taxes.
Some headlines alluded that gig workers would be paying higher taxes, but it’s more nuanced.
The new tax revenue is money that should’ve been collected all along, but many workers didn’t have the documentation that serves as a reminder and guide to reporting the incomes they make on these platforms.
“You are paying what you owe,” said Steve Wamhoff, director of federal tax policy at think tank The Institute on Taxation and Economic Policy. “But what you owe has not been increased.”
Why did the law change?
The original rules were fully set into place in 2012 and were tied to the Housing and Economic Recovery Act of 2008, legislation that was passed to address the subprime mortgage crisis that led to the Great Recession. At that time, Internet sales were a relatively young concept, and the big player in the market was eBay, an online marketplace in which many users resold items they purchased in transactions that often aren’t taxable.
“It’s like an online garage sale,” said Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University. “They created this threshold … because you didn’t want to create unnecessary burdens on eBay. You just really wanted to go after the eBay sellers that did it full time and had high volume.”
The new bill recognizes that those rules are now outdated. And with the explosion of the gig economy, many people aren’t getting the reporting reminders and information they often need to properly file their taxes. The problem not only leaves workers vulnerable to an audit from the IRS but prevents them from paying Social Security and Medicare taxes on that income. When the time comes to retire, they will have less Social Security payments to fall back on.
“Most gig workers do this work because they need supplemental income,” Bruckner said. “For many, Social Security is the only retirement they have.”
What do companies say about the change?
Etsy is worried that the extra tax reporting may drive some people away from its online marketplace.
The company, which caters to handmade or vintage products, said that asking people to provide their social security number up front before setting up their shops may create another barrier to entry for some sellers. The company’s goal, it says, is to create the easiest path to entrepreneurship.
However, others say it’s not an issue at all. For example, DoorDash said it uses 1099-NEC forms that already have the $600 threshold in place. Therefore, the change doesn’t really impact them.
Airbnb declined to comment, and Uber did not respond to Fortune’s request.
But Bruckner, who testified before Congress in 2016 over her concerns about the loopholes in tax reporting for companies like Uber and Lyft, says many of these companies still don’t offer sufficient documentation for their workers to properly file their taxes, even though other businesses outside this industry do.
“This is just creating uniformity for these big businesses for what small businesses are already doing,” she said. “It’s literally the least they can do.”
Will workers have to pay penalties for previous underreported incomes?
Any time people don’t pay taxes on their income, whether it be on purpose or due to a reporting error, they could face an audit and penalties as a result. But Bruckner said she doesn’t believe the new reporting rule will signal the IRS to perform an audit on anyone.
“I don’t know if the IRS has the capability to focus on that,” she said.
If anything, the new documents should make gig workers lives a little easier, according to Wamhoff of The Institution on Taxation and Economic Policy.
“Even if you want to do the right thing, you’re not provided with the documentation to do so,” he said. “Overall, I think this is helpful to everyone involved.”
