Gig Economy – Tax Requirements Considered

Gig Economy Tax Requirements

The Gig Economy has been an emerging and rapidly growing industry characterized by temporary/part time labor positions and freelance work filled by independent contractors known as gig workers. Gig workers earn income through providing on-demand work, services or goods. This gig industry can be broken down into the following segments:

• Professional Services (Business): Independent contractors completing a task for a business (e.g. Apollo, Upwork, Fiverr)
• Creators: Monetization of creations, skills or likeness; Social media influencers, and e-commerce live streaming (e.g. HireInfluence, Starpower, TikTok)
• Real & Personal Property Sharing Services: Rental of one’s property to another person (e.g. Air Bnb or HomeAway hosts)
• Marketplaces & Professional Services (Personal): Selling goods or services for households (e.g. Etsy, TaskRabit, Rover)
• Transportation Services: Driver completing delivery of goods, food, or people to a specific destination (e.g. Uber, Lyft drivers)

Gig Workers

Often this gig work is done by performing work in exchange for payment based on bookings through a digital platform like an app or website. Since these workers are receiving income in exchange for their services or goods, there are tax consequences to consider. Gig workers are required to report all their income from their part-time, temporary or “side hustle” on a tax return, including:

• Fees and commissions earned

• Tips and gratuities received

• Income from credit card payments through online platforms

• Rents and royalties

• Any other income related to their gig work

Digital Platform

Digital platforms are businesses that have created online systems such as apps or websites that facilitate connecting potential customers with gig workers' goods or services.  Digital Platforms also handle payment transactions when money is paid from one party to another for a good or service. Digital Platforms are obligated to evaluate tax reporting obligations of this money movement as the “middle man” of these transactions.

In handling transactions, digital platforms are also in a position to collect information on the income realised and report this information to tax authorities. What steps must digital platforms take to ensure compliance?

1. Identify payment types (Payment) – Rent, Royalties, Non-employee compensation, Bonuses, Sale of Goods
2. Identify sourcing of payments (Payer) - source of goods or services in the US means there is a 1099/1042S reporting obligation. Foreign sourced good or service means only 1099 reporting for US providers, no due diligence or US reporting requirement for non-US providers
3. What is due diligence obligation (Payee)? – per Section 3406 of IRC, the reporting of 1099 requires only the collection of TIN, and does not require W9. For non-US providers, there is still a requirement to collect form W8.
4. Determination Withholding Obligation - Once the Payment, Payer, and Payee details are known, there is determination of withholding obligation.
   • There is a tax treaty rate of withholding on non-US providers with US sourced income.
   • There is also an obligation by the digital platform to withhold on providers who’s name, and TIN do not match the IRS records (B notice)
5. Tax reporting – 1099MISC, 1099NEC, 1099K, and 1042S are all form types related to the type of payments common in gig industry.

Tax Considerations for Gig Economy

The IRS is updating their regulations in response to this new industry. To remain compliant and competitive in the gig economy, digital platforms will have to understand and stay up to date with the evolving tax compliance regulations.

1099K Threshold Changes

The form 1099K is used to report credit card payments processed through the digital marketplace. Historically there was a $20,000 reporting threshold, but new 1099K rules that are transitioning in 2024 to drop reporting threshold to $5,000 and will drop even further to $600 starting in 2025.

This rule change will result in more GIG workers receiving 1099 reporting and means more need for W9 tax form collection.

Digital Assets and Gig

The evolving digital landscape includes currency. More and more gig workers are seeking ways to be compensated with digital assets. The IRS, seeing this gap in existing guidance, has announced over the last couple years, a change in the requirement of tax reporting digital asset transactions. Soon, new due diligence requirements will be announced along with the publishing of form 1099DA. Keep an eye out for more details regarding the overlap of digital asset trading tax regulations and their impact to digital platforms in the gig economy.

Tax Penalties for Digital Platforms

Failure to comply with tax requirements can lead to tax penalties for digital platforms.

Common penalties assessed by the IRS for reporting errors by digital platforms include:

• Inaccurate TIN/name combinations (B notice)
  • The 1099 reporting requirement mandates the provision of a certified and valid TIN, a process achievable through a valid W-9 form
  • $50 penalty per instance
  • B notice processing is only part of the obligations a firm has to undertake before they receive a notice 972CG with a penalty assessed for invalid TINs.
• Late filing penalties
  • Up to $310 per form for tax year 2024 with a max of $630 per form for intentional disregard. If you know you have this obligation and don’t meet it, the IRS will enact strict penalties with no cap on the maximum penalty.
• And expensive 1099 correction filings
• While under audit, the IRS will expect an artifact trail showing proper
  • Payment characterization
  • Collection of tax certification forms
  • Accurate calculation of tax withholding based on tax status of accounts

Tax Reporting obligations

1099-K

Form 1099-K is an official IRS tax document that includes a breakdown of your annual gross earnings. Payments from credit card transactions to digital platforms are also documented on form 1099-K.

You’ll need to collect/ provide a 1099-K if:

• You earned more than $20,000 (changing to $5000 in 2024) in customer payments in the last year 
• You provided at least 200 credit card transactions in the last year

1099-MISC

Form 1099-MISC is an official IRS tax document providing a summary of other income from miscellaneous compensation including rent, royalties, prizes and legal settlements, etc.

You’ll need to collect/ provide a 1099-K if:

• You received at least $600 in the following types of payments
  • Rent
  • Royalties

1099-NEC

Form 1099-NEC is official IRS tax document providing a summary of compensation paid to non-employees including contractors for the year. Form 1099-NEC is only replacing the use of Form 1099-MISC for reporting independent contractor payments.

You’ll need to collect/ provide a 1099-NEC if:

• You received at least $600 in the following types of payments
  • Non-employee compensation
  • Bonuses

W8 Forms and 1042-S Reporting

Forms W-8BEN, W-8 BEN-E, W-8 IMY, are official IRS tax documents that need to be collected for non-US workers for all of the above listed income/ reportable payments types in preparation for data exports required for your 1042-S reporting.

• W-8BEN - Non-US Individual
• W-8 BEN-E - Non US Entity
• W-8IMY - Beneficial owners that are collecting US-sourced through intermediaries

Withholding tax calculation may also need to be done based on tax treaties.

Summary

Digital platforms which facilitate transactions are responsible for tax reporting; requiring them to identify payment types, sources of funds and services, and conduct due diligence. Tax considerations, including upcoming changes to 1099K thresholds and digital asset transactions reporting will impact the gig economy. Failure to comply with tax requirements will result in penalties for digital platforms, emphasizing the importance of accurate tax reporting obligations such as 1099-K, 1099-MISC, 1099-NEC, and 1042S forms, as well as the collection of W8 forms for non-US workers. Staying compliant with evolving tax regulations is essential for digital platforms to remain competitive and avoid penalties.

How can TAINA Platform help the Gig Economy and Digital Platforms?

TAINA Technology is an award winning RegTech company providing a digitized platform for W9/W8 Form Validation, TIN Matching, ongoing monitoring and withholding tax. Specifically concentrating around the IRS withholding tax obligations (for form W9 and the W8 Suite) as well as providing clean and accurate reporting data output (for 1099’s and 1042’s).

TAINA Platform Capabilities:

• The TAINA Platform allows for real time TIN validation of US and non-US contractors.

  • TIN match will minimize B notice processing and reduce error rate of W9 form collection further.

• TAINA’s Online / Mobile portal  allows for seamless collection of gig worker’s tax certifications through the Digital platform.
  • TAINA Online/ Mobile portal can be embedded into your digital experience using robust API functionality.
  •  Save your contractors 63% of their time in filling out tax forms, with minimal clicks using and improved “No Form” questionnaire journey
  • Streamline contractor onboarding online and form and TIN collection, real time validations on any device
• TAINA’s Withholding Tax Calculator helps with Non-US tax withholding calculation
• TAINA’s Transaction Engine output would allow for Tax Reporting identification and help identify 1099/1042S reporting obligations
  • TAINA also works with Information Reporting partners

For more information on how our fully automated Validation platform can add value to your business, get in touch or request a demo to see it in action.