Non-employee platform-based work seems like a sufficiently distinct phenomenon to require changes to either tax forms or the tax code to accommodate the new work arrangements that have arisen over the past decade or so, but the only truly novel element in platform work might be the online platform.
The IRS maintains that platform work is essentially an internet-fueled spin on the well-established concept of self-employed workers running small businesses. While those gig economy taxpayers may require increased outreach because they may not have a complete understanding of their tax obligations, the rise of platform work probably doesn’t require any new rules, particularly once information reporting gets underway in its expanded format. Because of the changes in the American Rescue Plan Act of 2021 (P.L. 117-2), that expansion is coming.
Increased tax information reporting for participants in platform work is step 1 in increasing compliance, even if compliance isn't lower than typical for taxpayers with self-employment earnings. Educating taxpayers on their obligations will be the second step, as noted in a previous post.
To that point, there has been a dearth of information about platform workers’ tax compliance in part because it’s hard to identify which taxpayers are doing platform-based work. But the deficiencies in the data the IRS has about platform workers will be dramatically shored up once the information reporting begins.
The IRS explained, in response to a Government Accountability Office report in May 2020, that there's no evidence that taxpayers who use platforms to find work are at any greater risk of noncompliance with their tax obligations than any other self-employed taxpayer. Perhaps the unique challenge for taxpayers who begin platform work is that they often seem to be turning to it to supplement other income or as a bridge between non-platform jobs. Given the ease of signing up with a platform, taxpayers may not initially consider their tax obligations when opting to do platform work.
The IRS already does outreach to self-employed platform workers, including through its year-old Gig Economy Tax Center, which provides basic instructions on recordkeeping, paying quarterly estimated taxes, and tax return filing. The principal message is that taxpayers performing platform work who aren’t employees are self-employed and have the same filing obligations as any other self-employed taxpayers. Other options that have been floated for helping platform workers comply with their tax obligations might not be as attractive in the wake of information reporting.
Check-the-Box
The May 2020 GAO report said the IRS could add a question to Form 1040, Schedule C, "Profit or Loss From Business," or Form 1099-NEC, "Nonemployee Compensation," asking whether a taxpayer had performed platform work. That would probably take the form of a checkbox, much like the ones that already ask whether a taxpayer has foreign bank accounts or bought or sold cryptocurrency. The IRS disagreed with the recommendation to change the forms on the grounds that it already had a communication strategy in place for helping to educate platform workers, and changing the forms would require added costs.
The IRS said that while a form change "could provide a count of self-reported platform workers, it is not expected to serve a benefit to improve tax administration, nor does the IRS see a clear jeopardy to tax compliance without implementation of this recommendation.” The foreign bank account and cryptocurrency questions on Form 1040 have a slightly different role in administering the tax laws than a hypothetical platform work question would. Because every taxpayer must answer them, they serve as a speed bump for taxpayers, reminding them of their obligations, but the IRS also uses them in the enforcement context.
Before the UBS investigation, which prompted legislation that effectively dismantled bank secrecy across the globe, some taxpayers were unaware of their obligation to report their foreign bank accounts, and there was no reporting from foreign financial institutions before the Foreign Account Tax Compliance Act. The dynamic at play in the platform work space is sufficiently distinct from foreign bank account and cryptocurrency ownership that the IRS’s position here makes sense.
Standard Business Deduction
An option to streamline the tax compliance of platform workers that would require action by Congress is a simplified deduction for business expenses. A standard deduction would be calculated as a percentage of gross earnings for specific types of platform work. It would reduce the complexity platform workers face in filing their tax returns, while also simplifying administration, particularly the examination function, for the IRS. It could be enacted with an option to deduct actual business expenses instead. Kathleen DeLaney Thomas of the University of North Carolina proposed a standard business deduction to replace the current requirement for self-employed taxpayers to track and report their business expenses, with a deduction of 60 percent of gross receipts.
Congress isn’t terribly likely to consider a standard business deduction anytime soon because of the American Rescue Plan’s increase in information reporting and the likely negative revenue estimate that a standard deduction would have. If, once information reporting is in full effect, it becomes apparent that platform workers have particularly high compliance challenges, the standard business deduction might reemerge as a way to help the IRS and taxpayers.