The Sharing Economy and the Tax Code Don’t Get Along

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The “sharing economy” has brought us trendy and useful new services such as Uber, Lyft and Airbnb that have made waves in their industries. The U.S. tax code has not caught up.

A movement is growing to make changes to the federal tax system to avoid threatening the viability of the sharing industry, but the solutions are so far elusive.

Individuals who want to work on platforms like Uber are “running smack-dab into the buzz saw of an outmoded tax code that is not designed to accommodate them,” said Rep. Steve Chabot (R-Ohio), chairman of the House Small Business Committee, in a Tuesday hearing which is the first of a two-part series on the sharing economy.

Chabot said the tax policies governing workers in the new gig economy present “new and unnecessary obstacles” for companies and workers. Many of these workers fail to file their taxes altogether. When they do, they often pay too much, Chabot said. They risk audits because they don’t know they can deduct certain expenses or they don’t have sufficient documentation to support those deductions.

Chabot and the hearing’s witness panel saw a common enemy — the Internal Revenue Service. The IRS has been enforcing outdated rules for businesses that don’t account for the strange legal gray area between “employee” and “independent contractor,” an issue that has plagued Uber for the past year or so.

“Unfortunately, the IRS has not been part of the solution for entrepreneurs in navigating this new sharing economy,” Chabot said. “Too often, it’s been part of the problem.”

While the panel expressed widespread agreement that the government should step in to give workers more benefits to avoid the legal gray area of independent contractor and worker, the top Democrat on the committee, Nydia Velázquez of New York, thinks workers “must be protected from unscrupulous business practices.”

“Most of the workers in the sharing economy classify their workers as independent contractors, not employees. Such classification saves businesses money through reduced benefits and tax withholdings,” Velázquez said. “Our current approach to answering this question seems to failing at the expense of hard-working Americans and our nation’s tax revenues.”

But the Association for Competitive Technology warns against reclassifying all sharing economy workers as employees, arguing that such a move would be “detrimental” to the sharing economy and small businesses specifically.

Morgan Reed, ACT’s executive director, also says the “heavy-handed” enforcement of outdated tax regulations “threatens both the innovation driving the sharing economy.”

He suggested the IRS improve its transparency and offer guidance for companies in the sharing economy.

Reed’s group is pushing for much broader (and unlikely) changes. He says every worker, whether an independent contractor or employee, should be provided with health insurance, Social Security benefits, as well Medicare and worker’s compensation through state or federal laws.

Rob Willey, vice president of marketing at TaskRabbit, said his company faces “very limited choices when it comes to the services and level of collaboration [they] can provide” for their workers. TaskRabbit is a service where a user can log on and find an individual in their area available to help with everyday tasks such as cleaning or moving for a fee.

Willey says “significant numbers” of TaskRabbit workers “are facing or are simply unaware of the tax compliance challenges or the tax benefits that confront them.”

Many workers on TaskRabbit are self-employed for the first time and don’t understand the obligations, he said.

The company worries that these burdens become so great that workers either accept fewer jobs through the app or leave the network outright. Willey suggested another unlikely solution to this problem — a short period of tax reprieve for the sharing economy to allow for companies to find new ways to give benefits to their workers.

Joe Kennedy, senior fellow at the Information Technology and Innovation Foundation, said the outdated tax regulatory code “is getting in the way for gig economy companies that want to support their independent contractors by providing benefits such as training, business advice, and financial planning.”

Morning Consult