Everything Gig Workers Need to Know About the Newest Tax Regulations

Fifty-nine million Americans were freelance workers in 2021—36% of the U.S. workforce. As we forge through The Great Resignation, more workers are opting to work outside of the office, and at home, in a car, or even in Bora Bora. With the option to work at any preferred time, the gig economy is booming with enthusiastic workers. 

Breaking Down the New Tax Requirements

Previously, for sales of $20,000—or at least 200 transactions—freelancers received a 1099-K from third parties like UpStart and Rapyd. Now, banks will have to report the total funds flowing (including check deposits or transfer money from finance apps) in and out of a bank account that equals at least $600.

With the gig economy growing substantially, the IRS has new tax requirements that impact gig workers. Announced January 12 on the IRS website, gig workers must report their earnings while filing taxes. They will receive 1099-K forms from third-party processors, such as Uber, PayPal, and Tipalti. While the IRS will not monitor gig worker transactions, they will monitor bank accounts exceeding $600 through 1099-K, 1099-NEC, and 1099-MISC reporting.

The new regulations are due to the billions of dollars of taxes legally owed to the IRS and never collected. The IRS can flag under-reported income and identify tax evaders with these new compliance requirements. The IRS created these requirements to improve tax compliance, and the implications go beyond freelance workers. They will affect nearly everyone—from individuals selling tickets on Stubhub or Ticketmaster to others that earn their entire income from contract work.

What these Taxes Look like for the Gig Economy

While the IRS has been very public about this new regulation, many gig workers don’t know they have to pay self-employment taxes. All incomes are subject to tax, even if the pay is less than $600. Now, gig workers need to keep track of their cash flow to report to the IRS accurately and have matching calculated payments received. 

When gig workers file a return, they will owe the self-employment tax, which is 15.3% and covers Social Security and Medicare taxes. This is a substantial tax payment–the employed pay half the tax, while their employer pays the other half. For a freelancer, they’re responsible for the entire tax.

But there is a bright side to this hefty tax increase. A special tax deduction for independent contractors allows workers to deduct half of their self-employment tax. They have two ways to cover their income tax:

1. If they have another job as an employee, they can submit a new W-4 document to their employer for more income taxes to be withheld. 

2. They can submit quarterly taxes to supplement their income taxes, and self-employment tax, throughout the year. 

Even if the taxpayer has a refund, they could still be penalized if they didn’t pay enough quarterly taxes through the full year, so it is important to complete the payments. 

Personal transactions and peer-to-peer networks will also be impacted. If a merchant sells their Playstation 1 and receives the payment on Venmo, they have to report the received payments. 

This 1099 revision will require more paperwork, and the IRS doesn’t want manual forms; they want taxpayers to utilize the most efficient systems possible to ensure compliance. 

Automation is a Tax Hero for the Gig Economy

With the new tax regulations instated, workflow complexities will increase, especially manual processes. Manual processes increase the likelihood of fraud, non-compliance, and reporting errors. These are weak points for businesses, which is why they need to streamline processes to manage compliance and fraud risk. With the latest change, prioritizing automation will be a lifeline for the gig economy.

This new tax process will be exceedingly repeatable due to the number of workers that gig industry businesses have to pay. With this process, the IRS is pushing down on what’s required to fill out forms manually—another imperative reason to implement automation.

New Regulations are Just the Tip of the Iceberg 

The 1099-K tax regulation is a hint of many more new regulations to come. Requiring comprehensive reporting on account cash flows allows the IRS to trigger voluntary compliance. You have to file taxes electronically, and for marketplaces or other businesses that rely on a pool of contract workers, you need to streamline how you generate tax forms, like 1099s, to remain compliant. Whether you have tens, hundreds, or thousands of gig workers on your platform, it’s critical to efficiently manage tax implications.

A modern, robust solution will help you remain compliant at both the federal and state levels. For example, technology companies like Zenwork are empowering their customers, from the smallest businesses to the largest corporations, to click their way to global compliance.

Modern CFOs and business leaders know that these tax changes are just the tip of the iceberg. They need to prepare for federal and state-level changes for the long-term success of their business—on top of securing their relationships with the freelancers that help make their brand great. 

Authors

Bill McNamara, Chief Financial Officer, Zenwork

Bill McNamara is a financial executive who thrives on developing and implementing scalable solutions that achieve operational efficiency to enable the growth of revenue, market share, and profitability. He has responsibility for Zenwork’s back office including Finance, Accounting, Legal, and Human Resources.

His background includes a wide range of financial and operational management experiences in a variety of different roles ranging from pre-revenue startups to large multibillion-dollar public companies including Theatro, Ziosk, SAP, PeopleSoft, Kraft Foods, and Arthur Andersen.

Bill has a BBA from the University of Wisconsin-Madison and an MBA from the University of Chicago Booth School of Business.

Rob Israch, GM Europe, Chief Marketing Officer, Tipalti

Rob Israch leads global marketing for Tipalti and runs their Europe business, bringing over 20 years of leadership experience to the company. During the 7+ years that Rob has served at the company, Tipalti has experienced 50X+ growth while helping the company receive a valuation of over $8.3 billion and becoming one of the select few companies in America to have made both the Deloitte Fast 500 and Inc 5000 lists for the last four years running. 

Prior to Tipalti, Rob served as VP, Global Marketing Programs at NetSuite, the leading provider of cloud-based Enterprise Resource Planning (ERP) software, helping to guide the company through 10X+ revenue growth, from a private company through IPO to cloud ERP market leader. Previously, Rob held a variety of executive roles at Intuit QuickBooks and GE Capital.