Helping your gig-economy clients sort out tax issues
Side hustle, moonlighting, freelance, a gig that’s part-time or full-time: Whatever a growing number of your clients call this job, it usually boils down to “self-employed” in the eyes of the tax man. That means the burden of compliance and recordkeeping falls to the worker, often with little official guidance.
According to recent figures from the Bureau of Labor Statistics, some 15.5 million American workers have “various alternative work arrangements,” including independent contractors, on-call workers, temporary help agency workers, and workers provided by contract firms. Other polls say as many as one in three American workers is somehow involved in the gig economy.
Such “gig” workers must calculate and withhold the proper taxes from their own paychecks; no employer or payroll department does it for them. A poll of Americans filing federal income taxes also found that only 39 percent of gig workers who owed federal taxes were able to pay their bill with “no impact” to their overall finances.
However, fewer than half of gig-only workers filing 2018 federal taxes were getting a refund, while two-thirds of traditional workers got one – and only 18 percent of traditional workers filing 2018 federal taxes owed, as opposed to 30 percent of gig-only workers.
Many of those who hold both traditional jobs and side gigs also reported extra stress trying to reconcile multiple sources of income, a key part of recordkeeping and compliance.
Problem is industry wide
Chances are good your clients’ gig employers aren’t helping. The National Association for the Self-Employed reports that almost seven out of 10 self-employed entrepreneurs received no tax guidance from the shared economy platform they work with.
Chances are just as good that the IRS isn’t gushing information for your clients. The Treasury Inspector General for Tax Administration (TIGNA) found that the IRS has yet to provide accurate guidance and notices about self-employment tax obligations – especially given that TIGTA found that discrepancies involving 1099-Ks from gig economy payers increased 237 percent from 2012 to 2015. Such information sources as IRS Publication 527, Residential Rental Property or Publication 463, Travel, Entertainment, Gift, and Car Expenses are too long and unclear for most gig workers to absorb, TIGTA noted.
The tax gap on this type of income may actually be larger. Under federal tax regulations, some gig economy businesses don’t have to issue a 1099-K unless workers earn at least $20,000 and engage in at least 200 transactions annually. Similarly, many gig businesses are uneducated about helping workers comply with tax law.
One nagging issue: Are gig workers independent contractors or employees? The NEW GIG Act of 2019, introduced in the Senate in March 2019, looks to test a service provider’s classification for tax purposes. Factors of the test include the relationship between the parties, the place of business or ownership of the equipment, and performance of the services.
Educate your clients
Gig clients may never have been able to afford to see a tax professional. “While we see dramatic growth in the … 1099 workforce, we also find that these individuals are no more likely to earn a full-time living … in 2016 than they were in 2005,” write the authors of “Is Gig Work Replacing Traditional Employment? Evidence From Two Decades of Tax Returns.”
“A majority of participants only derive small amounts of income from online platform [gig] work – fewer than half earned more than $2,500 in 2016,” the paper reads.
You can start with these clients’ simplest tax obligations:
- Many gig workers may not know about quarterly payments of self-employment tax, or may know it as FICA/Medicare tax, and may not know it’s slightly more than 15 percent. You might also have to explain that this doesn’t include federal, state, and local income tax, levied in various brackets. Stress the need to file on time – and the penalties for being late.
- Don’t underreport. Your clients may also be tempted to not report cash income; discourage this. Tell them to report all income and use legitimate ways to reduce it.
- Allowable expenses your clients might not know about can include software and subscriptions, office equipment, home offices, costs incurred in providing a service, and health insurance premiums. Note processing fees for certain payment methods are deductible, but the IRS has often tagged non-filers via submitted 1099-Ks, “Payment Card and Third-party Network Transactions.” Also make clear that personal expenses are only fractional deductible – or not deductible at all.
- Clients who are members of a partnership or have set up a limited liability company may be eligible for the new 20 percent qualified business income deduction.
Providing tax and accounting services to clients who work in the gig economy can be a great way to build your practice and provide much-needed assistance to this growing group. It’s also a great way to stress your role as a trusted advisor.
Editor’s note: Check out the benefits of QuickBooks® Self-Employed for your gig-economy clients.