Wealthy clients with side jobs such as high-priced consulting need to keep track of the latest income guidance from authorities—information that’s often scarce.
A recent report from the Treasury Inspector General for Tax Administration (TIGTA) found that with economic trends driving up the number of self-employed taxpayers, the IRS has to provide accurate guidance and notices about self-employment tax obligations.
The IRS last estimated the self-employment portion of the annual tax gap at $69 billion. TIGTA also reviewed cases in the IRS’s Automated Underreporter program for taxpayers who work in the gig economy and who have discrepancies between what is reported on their income tax returns and payments reported to the IRS on tax years 2012 through 2015. TIGTA found that discrepancies involving 1099-Ks from these gig economy payers increased 237 percent from 2012 to 2015, among other findings.
“The tax gap on this type of income may actually be larger, since many self-employed don’t report some income and it’s difficult to estimate the unreported portion,” said Brian Stoner, a CPA in Burbank, Calif.
“With as many as 8 percent of workers doing gig jobs, the importance of collecting tax on the income is obvious,” said Bill Smith, the managing director for CBIZ MHM’s national tax office in Bethesda, Md.. “The temptation to avoid reporting income when a worker doesn’t receive a 1099, especially if the worker hasn’t planned for taxes by filing quarterly estimated payments or saving the money to pay taxes, is compelling.”
The gig economy has also grown far beyond just millennial Uber drivers or people renting out bedrooms. “Estimates put gig workers at more than 40 million and U.S. Uber drivers around 1 million,” Smith said.
“The biggest misconception I have heard about being paid as a contractor is that the tax tops out at 15 percent,” said Ann Etter, a CPA/CFP with Goodney & Associates in Northfield, Minn. “The self-employment taxes on net income are approximately 15 percent up until the point where your overall earned income exceeds the FICA threshold, but the entire net income is also taxed at the ordinary income tax rates.”
She believes most self-employed taxpayers want to report income accurately. “For every person under-reporting income there’s someone over-reporting because they’re incorrectly including loan proceeds or transfers from their personal account as part of the taxable income of the business,” she said.
Accurate reporting of income depends on the client mind-set, according to Stoner. “Some don’t want to pay taxes, so if they think they can get away with it they may tend to under-report,” he said. The better strategy is to report the income and then find legitimate ways of reducing it by home office, auto mileage and other legitimate travel costs, he added.
The IRS replied to the TIGTA that there are plans to establish a single definition for the gig economy, perform demographic research on the population and identify “significant compliance risk associated with this expanding economic sector.”