Due to advances in technology like mobile applications and online platforms, millions of American workers now earn income through "gig" work, which allows them the flexibility to set their own hours and choose which jobs to take. To the surprise of many gig workers, the tax law considers them to be "business owners," which subjects them to onerous recordkeeping and filing requirements, along with the obligation to pay quarterly estimated taxes. This Article proposes two reforms that would drastically reduce tax compliance burdens for this new generation of small business owners, while simultaneously enhancing the government's ability to collect tax revenue.
First, Congress should create a "non-employee withholding" regime that would allow online platform companies such as Uber to withhold taxes for their workers without being classified as employers. Second, this Article proposes a "standard business deduction" for gig workers, which would eliminate the need to track and report business expenses. Although this Article focuses on the gig economy as an illustration of how the workplace has evolved in recent years, the proposals could apply more broadly to taxation of small, individually run businesses. In an era when the use of cash is on the decline and information can be shared rapidly at little cost, it is time for policymakers to institute a more modern tax enforcement regime for small businesses.
INTRODUCTION 1417 I. TAX ISSUES FOR WORKERS IN THE GIG ECONOMY 1419 A. Background on the Gig Economy 1419 B. Tax Issues Related to Gig Work 1421 1. Tax Implications of Non-Employee Status 1422 2. Information Reporting for Gig Workers 1425 3. Gig Workers Are Business Owners, But Many Don't Know It 1428 4. The Need for a New Regime 1430 II. A NEW TAX REGIME FOR THE GIG ECONOMY 1431 A. The "New" Small Business Owners: What's Changed 1432 1. Tax Enforcement in the Old Economy 1432 2. Tax Enforcement in the New Economy 1433 B. Expanded Information Reporting 1436 C. Non-Employee Withholding 1437 1. Why Withholding Matters 1437 2. Details of the Proposal 1443 a. Scope of Withholding 1443 b. Self-Employment Taxes 1445 c. Setting an Appropriate Rate 1445 d. Calculating Self-Employment & Income Taxes Based on Net Income 1447 i. Estimating Net Income 1447 ii. Calculating Tax Liability on Presumed Net Income 1449 e. Implementation Details 1450 f. Opt-Out 1453 D. The Standard Business Deduction 1454 1. Why Allow a Standard Business Deduction? 1454 2. Details of the Proposal 1457 a. Structure and Scope of the SBD 1457 b. Earnings Cap 1459 c. Flat Versus Percentage SBD: An Example 1460 d. Costs and Benefits of an SBD 1461 e. Equity Implications of an SBD 1462 f. Additional Drawbacks of a Flat SBD 1462 g. Coordination with Gross Receipts Withholding 1463 E. Combining the Proposals: Examples 1464 III. ISSUESS AND OBJECTIONS 1466 A. The Scope of the Proposals 1466 B. Objections Related to Withholding 1467 C. Objections Related to the SBD 1469 CONCLUSION 1472 INTRODUCTION
Technology is revolutionizing the way we do business. Online platforms like Uber and TaskRabbit now efficiently connect service providers and other workers with willing consumers. This new mode of transacting has transformed the landscape for twenty-first century workers. No longer must they choose between working solely as an employee (subject to the restrictions and control of their employer) and starting their own business (requiring an investment of time and money to do things like advertise and find a customer base). Using mobile applications, workers can now tap into the existing infrastructure and customer network of an online platform company, while still maintaining the freedom to set their own hours and choose which jobs to take. (1) As a result, millions of Americans have joined the so-called "gig economy" (2) in recent years, and that number continues to rise. (3)
The profile of the twenty-first century gig worker is somewhat different than that of a traditional small business owner. The former tend to be younger, less financially sophisticated, work fewer hours--often supplementing traditional employment with gig work--and make less money. Whereas a traditional sole proprietor who owns a catering business, for example, might earn $100,000 per year working 40-hour weeks, a typical Uber driver earns less than $10,000 per year and works fewer than 15 hours per week. (4) Because the majority of gig workers use online platforms to supplement wages or otherwise earn part-time income, they are commonly thought of as independent contractors rather than small business owners.
But from a tax perspective, there is little distinction between the full-time caterer and the 10 hours per-week Uber driver. For tax law purposes, if an individual earns income from services outside of the traditional employee-employer relationship, that individual is a "business owner" for tax purposes. What this means is that the Uber driver earning $8,000 per year must file the same complex tax forms and make the same quarterly tax filings as a seasoned, wealthy business owner. And the tax implications of being a business owner can be severe. Because there is no employer to withhold taxes, business owners must budget for self-employment and income taxes on their own and pay quarterly estimated taxes to avoid imposition of a penalty. The taxpayer must also keep receipts and other detailed records of expenses to calculate their taxable income on IRS Schedule C, which can be a burdensome and time-consuming process. Many gig workers do not consider themselves to be business owners and have never filed business-related tax returns; thus they are at best confused by, and at worst completely unaware of, their tax obligations.
For a more established business owner--one who earns significant income, has an established book and recordkeeping system, and likely employs an accountant--the current business tax regime may be appropriate. But that regime is a mismatch for lower-income and potentially unsophisticated gig workers. Subjecting them to tax compliance rules aimed at traditional sole proprietors is not only burdensome but also likely leads to lower tax compliance, which in turn leads to less revenue for the government. It is also inefficient, as individuals spend hours of time navigating complex tax rules to report relatively low amounts of income.
This Article argues for a new tax regime to apply to workers in the growing gig economy. In doing so, it proposes two fundamental changes to the current tax law. First, it calls for "non-employee withholding" on earnings paid out by online platform companies like Uber and TaskRabbit. Like traditional employers, platform companies would withhold a fixed percentage of a gig worker's gross receipts to cover the worker's self-employment and income tax obligations, obviating the need for the worker to file quarterly estimated taxes. Second, the Article proposes a "standard business deduction" (SBD) for gig workers. Like the regular standard deduction, the SBD would be optional and the taxpayer could forego it if actual business deductions exceeded the SBD. However, if the taxpayer chose the SBD, she would simply report her net business income by subtracting the SBD from her gross receipts, (5) eliminating the need for her to track and report business expenses. This highly simplified tax regime should improve compliance and taxpayer morale among gig workers, as well as increase efficiency by reducing the time, financial cost, and anxiety associated with tax compliance.
While this Article focuses specifically on gig workers to illustrate how the business landscape has changed in recent years, the proposals could apply more broadly to individual small business owners. Alternative work arrangements are on the rise, money is changing hands electronically, and sharing information is easier and cheaper than ever before. On the plus side, this means that tracking income and withholding taxes are often viable now when they previously were not. The downside is that more and more taxpayers are being subjected to complicated tax reporting rules for relatively small amounts of income. Thus, this Article's ultimate goal is to advocate for an updated tax regime that reflects the modern realities of small business ownership.
The Article proceeds in four parts. Part I provides general background on the gig economy and the current tax rules applicable to all small business owners, including gig workers. Part II details the two proposals: non-employee withholding and the standard business deduction. Part III explores potential issues, objections, and alternatives to the proposed regime.
TAX ISSUES FOR WORKERS IN THE GIG ECONOMY
This Part summarizes the evolution of the gig economy and discusses particular tax challenges faced by gig workers. Many of these challenges apply more broadly to all types of individual small business owners. (6) However, it is useful to focus on the gig economy because it highlights two trends that are highly relevant to the design of tax compliance policies. First, digitization has made commercial transactions traceable when they previously were not, which can greatly improve tax enforcement. Second, the role of platform companies as online intermediaries enables tax authorities to gather information about multiple taxpayers from a single source.
Background on the Gig Economy
Advances in technology and the proliferation of smartphones have made it vastly easier for consumers to connect with providers of goods and services via the Internet or mobile applications. (7) This new virtual marketplace has been created by a number of online platform companies like Uber, Lyft, TaskRabbit, and Airbnb, (8) whose websites and apps allow consumers to search for and purchase goods or services. At the same time, the platforms allow workers to advertise and sell goods or services in exchange for a fee (typically a percentage of the worker's...