Tax Treatment of Gig Economy Workers

Tax Treatment of Gig Economy Workers

August 11, 2021
Tax Treatment of Gig Economy Workers
The gig economy (or sharing economy) is a form of work
code treats gig economy workers like sole proprietors, the
relationship that has become popular in recent years. Gig
single employee of an unincorporated small business.
economy workers earn income by providing on-demand
work, with “gigs” often facilitated through digital
Income Taxes
platforms. This In Focus provides an overview of how gig
Gig economy workers have the same federal income tax
economy workers are taxed and reviews recent legislative
obligations as traditional employees, and are subject to the
changes.
same tax rates. Net income from gig economy work
(revenues less deductions) is subject to federal income tax,
What Is the Gig Economy?
even if the platform does not report it to the IRS.
There are three parties to a gig economy transaction: the
worker, a digital platform, and a consumer. Digital
Income tax deductions. Gig economy workers are eligible
platforms, such as Uber, Airbnb, DoorDash, and
for the same deductions available to other small business
TaskRabbit, match workers with consumers and often
owners. This allows gig economy workers to deduct certain
process payments. Many platforms also set rates for work.
operating costs to determine net business income. Some
Because the digital platforms act as intermediaries, workers
deductible expenses include business-related mileage in a
and consumers often have less interaction with each other
personal vehicle, equipment and materials needed for work,
(in terms of advertising, contracting, payment processing,
and the use of a home office. Gig economy workers may
etc.) than in other freelance business relationships.
also deduct half of self-employment taxes paid as an above-
the-line deduction on their individual income tax returns.
Participation in the gig economy is widespread. Although
These deductions are available to gig economy workers
the major digital platforms are the best known, many gigs
whether they itemize their deductions or not.
predate the internet and do not use digital platforms. For
more on the gig economy and what it means for workers,
Many of these deductions are not currently available to
see CRS Report R44365, What Does the Gig Economy
traditional employees. The 2017 tax revision (commonly
Mean for Work ers?
referred to as the “Tax Cuts and Jobs Act” or TCJA; P.L.
115-97) temporarily repealed the deductibility of
The tax treatment of gig economy workers is very similar to
unreimbursed expenses incurred by an employee for tax
that of other self-employed workers. The gig economy is
years 2018 to 2025 (through the limit on miscellaneous
sometimes called the “1099 economy,” named after the
itemized deductions).
series of IRS forms that income is reported on. The
particular Form 1099 that gig economy workers receive
Qualified Business Income deduction. The TCJA created
depends on the work they do and the platform’s legal
the Qualified Business Income (QBI) deduction. The QBI
structure. In many cases, a gig economy worker (and the
deduction allows many gig economy workers to deduct
IRS) will receive a 1099-NEC (a new form that replaced
20% of their net business income from their taxable
some functions of the 1099-MISC) or 1099-K from a
income. The QBI deduction is available to pass-through
platform they perform services for. Gig economy workers
businesses with certain income and structure requirements.
are independent contractors—broadly, workers who provide
The deduction is available to tax filers regardless of
a service but are not employees of the organization. (In
whether they itemize deductions and is generally calculated
contrast, traditional employees are sometimes referred to as
based on net business income (i.e., income less all
“W-2 employees” reflecting the information return on
deductions, including half of self-employment taxes).
which their employee compensation is reported.)
Self-Employment Taxes
What Taxes Are Gig Economy Workers
Gig economy workers owe self-employment taxes, a term
Subject To?
that generally refers to Social Security and Medicare taxes
Gig economy workers are generally subject to the same
paid by self-employed workers. Traditional employees pay
taxes as other self-employed individuals. They calculate
comparable taxes, statutorily splitting them equally with
their liabilities and pay any unpaid taxes as part of their
their employers. Gig economy workers, like self-employed
individual income tax returns (i.e., IRS Form 1040). Gig
workers more generally, must pay the employee and
economy workers owe federal income tax and social
employer portions themselves. For most gig economy
insurance taxes on income they receive, comparable to the
workers, the tax rate is 15.3% (12.4% for Social Security
taxes W-2 employees owe. (For self-employed workers,
and 2.9% for Medicare) on net earnings from gig economy
social insurance taxes are often referred to as “self-
work. However, as previously discussed, gig economy
employment” taxes, discussed below.) Since gig economy
workers may also deduct half of these taxes as an above-
workers are often paid as independent contractors, the tax
the-line deduction on their federal tax returns.
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Tax Treatment of Gig Economy Workers
Gig economy workers owe self-employment taxes if they
have a traditional job can file a new Form W -4 with their
have net earnings (earnings minus deductions) of $400 or
employer, requesting a larger automatic withholding to
more from self-employment, even if the income is not
cover the taxes on their income from gig economy work.
reported to the IRS. The Social Security portion of self-
employment taxes is combined with wage income toward
Gig economy workers who are not also traditional
the annual income maximum for the Social Security tax
employees generally need to file quarterly estimated tax
($142,800 in 2021). There is no income maximum for the
payments. Generally in April, June, and September of the
Medicare portion.
tax year and the January of the following year, a quarter of
the worker’s annual estimated tax bill is due to the IRS.
What Are the Platforms’ Reporting
This amount includes income tax and self-employment tax
Requirements?
liabilities.
Many of the major digital platforms have taken the position
that they qualify as “third party settlement organizations”
Are Gig Economy Workers Eligible for
(26 U.S.C. §6050W). Under prior law, a de minimis
the EITC and Other Tax Credits?
threshold provided that such organizations only needed to
Gig economy workers’ eligibility to participate in
report the income a gig economy worker received to the
government programs varies by program. Generally, gig
IRS if the worker earned more than $20,000 on the platform
economy income is treated as self-employment income for
and conducted more than 200 transactions within a calendar
many programs.
year.
Gig economy income is considered “earned income” for
Relatively few gig economy workers —especially those
calculating eligibility for, and the amount of, the Earned
whose gig economy work supplemented their income—met
Income Tax Credit (EITC). Hence, gig economy net income
these thresholds, so their income from platforms was not
may result in a larger or smaller credit, depending on the
reported to the IRS. Tax noncompliance is higher when
taxpayer’s adjusted gross income, number of qualifying
income is not subject to third-party reporting. A GAO
children, and filing status. Gig economy income used to
report (GAO-20-366) published in 2020 recommended that
calculate the EITC must be included on a tax return, even if
the IRS evaluate reporting thresholds to improve tax law
it is not reported to the IRS by a platform. Gig economy
compliance for gig economy workers.
income may also affect eligibility for, and the amount of,
the child tax credit and the child and dependent care credit.
The American Rescue Plan Act of 2021 (P.L. 117-2)
significantly lowered this de minimis threshold. Starting in
What Tax-Advantaged Options Do Gig
2022, platforms will be required to report to the IRS
Economy Workers Have for Health
payments to workers that exceed $600 in a calendar year.
Insurance and Retirement Savings?
The new reporting threshold for third party settlement
Gig economy workers who meet the requisite eligibility
organizations is the same as the threshold for payments
requirements may be eligible for Medicaid or premium tax
made by other businesses (26 U.S.C. §6041). The Joint
credits to purchase health insurance through the health
Committee on Taxation (JCT) estimated this policy change
insurance marketplace. Gig economy workers who pay out
would increase federal tax revenue by $8.4 billion from
of pocket for all or a part of health insurance premiums may
FY2021 through FY2031.
qualify for a self-employed health insurance deduction.
This above-the-line deduction can be used whether or not
How Can Gig Economy Workers Meet
the worker itemizes deductions.
Their Tax Obligations?
In general, taxpayers pay their income tax liability as
Gig economy workers may qualify for a variety of tax-
income accrues over the tax year, and in advance of filing
advantaged retirement savings options. Individual
their tax returns. This is typically done through automatic
Retirement Arrangements (IRAs) are available to everyone
withholding from employees’ paychecks, or quarterly
who meets eligibility requirements, not just self-employed
estimated tax payments on other taxable income. Gig
workers. Other plans, such as a SEP-IRA, one-participant
economy workers who expect to owe taxes on their gig
401(k), or SIMPLE IRA, offer other opportunities for gig
economy income make quarterly estimated tax payments to
economy workers to save for retirement in tax-advantaged
the IRS. Failing to do so can result in the taxpayer having to
accounts. Gig economy workers with relatively low
pay these taxes when filing their individual income tax
incomes from all sources and who meet other requirements
return and owing an underpayment penalty. Calculating the
may be eligible for the Retirement Savings Contribution
amount of the underpayment penalty can be complex and is
Credit.
usually done by the IRS.
Anthony A. Cilluffo, Analyst in Public Finance
Gig economy workers have several options to pay taxes
owed on their gig economy work. Such workers who also
IF11896

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Tax Treatment of Gig Economy Workers

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https://crsreports.congress.gov | IF11896 · VERSION 1 · NEW