Gig economy companies may be unaware of a new requirement in the latest American Rescue Plan stimulus package designed to help workers track and pay their taxes correctly each year. The new requirement is the result of a change in US tax law that requires platform companies to inform contract workers about how much money they have made on their platforms. The requirement comes into force at the beginning of the 2022 tax year.
What has changed?
Previously, gig economy companies only had to report the incomes of workers with very high earnings and high transactions. However, under the new law, more gig workers will receive a Form 1099-K that shows their gross earnings from gig economy platforms. Companies also submit Form 1099-Ks to the IRS.
The new requirement is likely to help gig workers who make quarterly estimated income tax payments and who have to pay double the Social Security and Medicare tax rates that traditional workers pay. Unsurprisingly, gig employees will get a surprise at the end of every tax year if they haven’t monitored their potential tax liability. If they don’t closely monitor their potential tax liability, they could repay taxes that they are not prepared for and cannot afford.
However, tax professionals who assist employees with tax issues believe the requirement is a good place to start to assist them with their annual tax bills. Additionally, the requirement assists the IRS in tracking taxes owed by gig workers.
What do you have to do?
The new law requires companies to submit employee tax forms if they earn more than $ 600, regardless of the number of transactions. The previous law and IRS guidelines only required gig companies to submit many employee tax forms if they earned more than $ 20,000 in income through more than 200 transactions. Many gig workers could easily fall below the threshold of the current requirement. In fact, only 30% of gig workers made more than $ 5,000 in 2016.
The requirement is also likely to create the most value for gig staff who do multi-platform work. Of course, they still need to reserve their earnings and save to meet their tax obligations.
You should be prepared for questions from your staff about this new development and train your managers on how to respond correctly. A key part of this is making sure your managers don’t become tax advisors. They should be prepared with simple topics of conversation that explain the reason for the new documentation and guide employees to the right company channels for further communication.
Conclusion
Overall, the new requirement reflects the continuous development of gig work. The tax code was drawn up taking into account established companies and traditional employers. While the new reporting requirement is a step in the right direction, gig workers are still looking for laws to help save for retirement and create portable benefits for gig workers. We will keep an eye on these developments and provide updates as necessary.