Candace Ewell, principal in the appropriately named Tax Controversy and Regulatory Services team at PwC, recently spoke to Sovos about form 1099-K, which has become a focal point for the IRS, states and companies in the sharing economy. She will present on the topic of the 1099-K at the Sovos Intelligent Reporting Summit in Denver in October.
Form 1099-K exists so that merchant acquiring entities (e.g. credit card processing banks) and third-party settlement organizations (TPSOs), such as ride-share or home-share platforms, can report to the IRS payments made to service providers. TPSOs are companies that serve as platforms for accepting payments for services via credit card. For example, a ride-share service would use form 1099-K to report payments made to drivers. With the sharing economy exploding, the 1099-K has suddenly become a flashpoint for controversy.
Under federal and most state tax laws, service providers only receive a 1099-K if they meet a threshold of earning more than $20,000 and completing more than 200 transactions in a year. That’s and, not or. That threshold likely leaves the majority of sharing-economy workers out of receiving 1099-K forms, although those workers are still responsible for reporting their income on a form 1040. However, income earned by workers that don’t receive a 1099 or W-2 is less visible to the IRS.
Recognizing that the high federal 1099-K threshold is likely preventing money from coming into government coffers, states such as Massachusetts and Vermont have lowered their 1099-K reporting thresholds to just $600. The states believe the lower threshold will enable them to collect an extra $20 million and $1.5 million, respectively. As a result, TPSOs are scrambling to cope with changing reporting requirements, and service providers in the sharing, or “gig,” economy, are receiving unexpected forms 1099-K in certain states.
Sovos: What makes form 1099-K so difficult for some companies to handle?
Candace Ewell: It’s less difficult for credit card companies. They report payments in and payments out. Where it gets complicated is with the TPSOs, the online marketplaces, trying to determine, am I this kind of payer? These companies tend to be young. Lo and behold they stumble into a tax obligation they weren’t planning for.
Sovos: You mention that these companies tend to be young, and yet a few really big, established names spring to mind when we talk about TPSOs. Are there others out there that aren’t as well known?
Ewell: There are a lot of other platforms that are TPSOs and they allow consumers to purchase a range of goods and services. Just recently, I was looking for technical support for my home. I found a website that offers to connect consumers with qualified technicians. The service provider comes to your home and installs your TV, security system, etc. Consumers pay the website and the service providers collect their fee from the website. Often, the service providers are considered independent contractors and the sites provide a method to advertise the service and collect payment, but the websites don’t typically employ the service provider.
Sovos: And the people who run these platforms might not be well versed in the intricacies of tax reporting, so they might not even know if they’re not in compliance.
Ewell: Exactly. If you’re a kid in the basement, the last thing on your mind is tax reporting. They’re worried about getting the product to market and getting dollars to come in the door. The things they think about last are accounting and the regulatory matters.
Sovos: How about individuals? How well do they have to understand the system in order to report revenue to the IRS?
Ewell: If an individual is working in the sharing economy, they are typically running a small business without realizing it. As a result, often they need to prepare a Schedule C to report their business income and Schedule SE to pay self-employment tax. These schedules are not typically required of a person only receiving a form W-2 reporting income from employment. Preparing these schedules is likely a new requirement resulting in a learning curve for those earning in the sharing economy.
Sovos: So, a lot of gig economy workers really aren’t reporting the income they should? That would explain why some states have dramatically lowered the 1099-K threshold.
Ewell: There definitely are research pieces out there that suggest that. If it is just a side hustle, I’m never going to get a 1099-K because the amount I earn will not trigger the reporting requirement. If I’m making a living with the gig economy, I’ll get a form 1099-K. Many websites functioning as a platform provide their users with a statement that reports their earnings and other relevant data points, and these statements are provided whether or not a form 1099-K is required.
Sovos: But can’t that have a negative effect on individuals in the long run if their earnings don’t go toward Social Security?
Ewell: If I am self-employed, my earnings are subject to Social Security tax through self-employment tax. Your average taxpayer may not be aware that this is their responsibility because it’s always been their employer’s responsibility. It’s just complicated.
Sovos: Why isn’t the IRS better able to enforce penalties for unreported revenue, or at least help taxpayers understand what they owe?
Ewell: The IRS has recently established a microsite on their website that is designed to provide information to those earing in the sharing economy. It would be good if this were advertised more.
Sovos: Have budgetary issues affected 1099-K enforcement as well?
Ewell: It would not be difficult to conclude that IRS budget issues have had an impact on how form 1099-K data is managed. A recent Senate Finance hearing held by the Subcommittee on Taxation and IRS Oversight highlighted the need for IRS technology updates as well as the requisite budget commitments needed.
There are many more issues surrounding the 1099-K. Be there as Ewell and other experts discuss them at the 2018 Intelligent Reporting Summit in Denver in October. Plus, use code 2018GCS10 to receive 10% off your registration!