Two trends have converged to create a nightmare for tax information reporting. First, the sharing economy has redefined work and taxation of wages. Second, the IRS has decided that it needs to bridge the gap between revenues and taxes paid—a divide that the sharing economy has only made wider.
The result is a nightmare scenario for anyone involved in tax information reporting that is only going to get worse. The federal government and state governments are just beginning to craft tax laws to catch up with the sharing economy, while at the same time the sharing economy itself is set to explode.
For organizations that are part of the sharing economy, the clock is ticking to centralize and automate reporting processes. Complying with changes in tax codes with an automated system will present challenges, but trying to do it using manual processes plagued by internal disorganization will be just about impossible. And the cost of non-compliance could be very high.
Enough Sharing to Go Around
Taxi drivers and hotel operators have already felt the impact of the sharing economy, or the “gig” economy, as it is sometimes known. Ride-share titans Lyft and Uber have put a major dent into the taxi industry, just as Airbnb and HomeAway have put a hurt on hoteliers.
But there’s more to the sharing economy than just cheap rides and overnight stays in somebody’s vacation house. eBay pioneered the sharing economy with its person-to-person auction platform more than two decades ago. Emphasizing the “gig” in gig economy, TaskRabbit and Etsy offer platforms for people to have simple errands done by their peers or custom order arts and crafts.
There are scores of others, and what exists now is only the beginning. The numbers behind the sharing economy are staggering:
- Time magazine reported this year that 42 percent of Americans used some element of the sharing economy, while 22 percent of Americans offered some sort of product or service. Total participation was 44 percent.
- According to a recent study from the Pew Research Center, and estimated 24 percent of Americans reported earning money from online platforms, including eBay.
- A study by market research firm Juniper Research shows on-demand economy revenues are at $18.6 billion.
- eMarketer reports that 26 percent of all adult Internet users in the US will use the gig economy in 2017—a number that doesn’t include participation in online marketplaces such as eBay.
Those numbers are only going to rise. eMarketer projects its number will rise from 26 percent in 2017 to 38 percent in 2021—a figure that represents 86.5 million people. The Brookings Institute estimates the size of the sharing economy is set to grow from $14 billion in 2014 to $335 billion by 2025. That is explosive growth, and the government is scrambling to keep up with it.
Closing the Sharing Economy Gap
The core IRS form of the sharing economy is the 1099-K, not to be confused with the more familiar 1099-MISC. The 1099-MISC, a source of much complexity and confusion in and of itself, is usually issued to contractors who work directly as contractors for employers.
When a third party such as a sharing-economy application steps in, the 1099-K comes into effect. Payments made with a credit card or payment card, including third-party network transactions such as those involved in the gig economy, fall under the domain of the 1099-K and not the 1099-MISC.
This is where the IRS has a problem. The minimum threshold for reporting income via 1099-MISC is just $600. But for the 1099-K, the threshold is a whopping $20,000 and 200 transactions.
What’s happening, then, is that the overwhelming majority of would-be 1099-K recipients aren’t getting taxed at all—and sharing-economy organizations don’t have to report those 1099-K forms to the IRS or to states … yet. For perspective, in tax year 2016, the IRS received 10 million 1099-K forms versus around 93 million 1099-MISC forms.
New Laws and New Reporting Complications
On the legislative side, Congress and states are out to get the money they feel they’re losing to the gig economy. A significant lowering in the earnings threshold for gig taxation seems likely to be part of any new tax legislation that emerges from the federal government. One bill in Senate committee, for instance, would lower the 1099-K earnings threshold from $20,000 to $1000.
Reporting is likely to be a major focus of any federal legislation. IRS studies have shown that if payments are reported to the IRS, only 7 percent of income goes unreported. However, without tax information reporting, 63 percent goes unreported.
States, meanwhile, have already begun to demand their piece of the revenue pie. In Massachusetts, Governor Charlie Baker’s fiscal year 2018 plan includes 1099-K reporting with the same $600 threshold as the 1099-MISC. With the Massachusetts House is also on board, the plan is likely to become law.
Vermont is pursuing a similar provision, and heavy hitters such as California and New York are likely not far behind. As the gig economy grows, both the federal government and state governments will continue to pass legislation aimed at closing the tax gap, and that will make a complex situation even more confusing.
Already, confusion surrounds the 1099-K. Since it reports gross payments inclusive of sales tax, sharing-economy providers might actually be over-reporting income. And then there’s the general befuddlement surrounding state reporting: According to Bloomberg BNA’s 2017 Survey of State Tax Departments, only 8 states require ride-sharing to collect sales tax, while 25 states hold the owner of accommodations on a third-party site as responsible for collecting sales tax, and 15 states hold the third party responsible.
Preparing for Chaos
For sharing-economy companies, tax-reporting chaos is inevitable. As governments seek to close the tax gap and the IRS responds with what are sure to be changing compliance requirements, gig-economy provides will face constant change and confusion—not to mention potentially large financial penalties for late or incorrect 1099 filings.
The best a sharing-economy company can do for changes in rules for tax-reporting compliance is be prepared. That means having a streamlined, automated operation that is nimble enough to react to change and automated to facilitate a shift to following new reporting rules.
The answer is to establish a center of excellence in tax information reporting as quickly as possible. A center-of-excellence model promotes efficiency by placing responsibility for compliance in the hands of a select group rather than distributing it among employees from different departments and geographies.
When combined with automation, centralizing tax operations enables gig-economy companies to have the capacity to both react quickly to changes in compliance requirements and anticipate what the next challenges will be.
Automation goes hand-in-hand with centralization. Manual processes don’t offer enough speed for gig-economy players to keep up with the many changes coming in reporting compliance. The pace of change will simply be too fast. Companies need to make changes on the fly. Automation enables them to do that.
Process automation offers built-in risk aversion without the resource-intensive chore of having to build a reporting system in-house. Keeping up with compliance changes in the gig economy will be difficult enough. Keeping up with manual processes or convoluted, inflexible systems built in-house will be nearly impossible.
The Sovos Solution
Sovos enables organizations to centralize and automate their tax-reporting processes. As the largest 10-series filer in the United States, Sovos serves nearly half of the Fortune 500 across 52 different industries for 1099 reporting.
As sharing-economy companies deal with rapid and sweeping changes to compliance rules, Sovos provides cloud-based, hybrid and on-premises solutions that enable them to maximize efficiency and avert risk at a time when the booming sharing economy and government desire to claim a piece of it are about to collide.
Discover how Sovos’ 1099 reporting solutions enable sharing-economy companies to stay ahead of change.
Contact Sovos to learn more about automating tax reporting.