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Improving the Federal Tax System for Gig Economy Participants (Watson)

Improving the Federal Tax System for Gig Economy Participants by Garrett Watson published by Tax Foundation (10/2019).

 Advances in technology have enabled workers to connect with customers via online platform applications for work ranging from ridesharing to home repair services. The rise of gig economy work has reduced barriers to selfemployment, bringing tax challenges like tax complexity and taxpayer noncompliance. · Workers who previously relied on employers for withholding of income and payroll taxes must properly calculate, save, and remit income and selfemployment taxes. Gig economy workers are more likely to underreport their income or underpay self-employment tax. One survey of gig economy workers found that 34 percent did not know that they may be required to make quarterly estimated payments to the Internal Revenue Service (IRS). · Most gig economy platforms use a high de minimis threshold for reporting earnings to the IRS and workers, making it more likely that workers fail to meet their tax obligations. Lowering this threshold may help with information sharing of worker earnings and improve compliance rates. One study finds that workers who receive an earnings report increased their reported income by up to 24 percent. · Properly tracking and deducting expenses from gross income is one of the largest challenges for gig economy workers, which can lead taxpayers to accidentally overpay income and self-employment taxes. Taxpayers must determine which expenses may be deducted and divide their expenses between business and personal purposes to calculate taxable income, which can be complicated to determine for mixed-use assets such as ridesharing vehicles or rooms for short-term rental. · Options for improving the federal tax system for gig economy work include providing a simplified expense deduction, lowering reporting thresholds, and allowing gig economy platforms to voluntarily withhold income and selfemployment tax on behalf of their workers. These proposals would lower taxrelated barriers to entering gig economy work, but should be weighed against trade-offs such as making the tax treatment of gig economy participants less neutral.

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