Yesterday, the California Franchise Tax Board convened a public meeting to discuss tax compliance within the growing gig economy and the challenges of meeting these obligations. Speakers from academia, the FTB, the business community, and gig workers themselves, discussed various tax issues, three of which stood out.
First, California’s nonconformity to federal worker classification causes complexity and challenges. California recently passed Assembly Bill 5, effective January 1, 2020, which codified the California Supreme Court decision in Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903. Dynamex created a presumption that a worker is an employee rather than an independent contractor unless this presumption is rebutted by meeting the “ABC” test. The IRS, however, uses a different multifaceted test to determine whether a worker is an employee or independent contractor. This federal/state difference will produce an extreme compliance burden when California classifies a worker as an employee, while the IRS classifies this same worker as an independent contractor.
Second, gig workers tend to underreport income because the platform companies they work for do not issue Form 1099-K to all workers. Platform companies are required to issue Form 1099-K when payments exceed $20,000 and the aggregate number of transactions exceed 200. Gig workers often fall below this threshold. According to one of the meeting presenters, in 2016 only 12 percent of gig workers received 1099-Ks.
Third, many gig workers are unaware that they are signing up to become small business owners subject to complicated compliance rules. For instance, gig workers must track their miles and expenses, which may be difficult due to in-app functions and restrictions. Gig workers may also be required to obtain a business license in certain jurisdictions.
Those at the meeting also discussed important policy considerations. For example, gig workers reportedly lack certain protections provided to employees such as workers’ compensation. As a result, the workers may need to rely more heavily on the government for assistance. In addition, low-wage workers are reportedly more dependent upon the gig economy than high-wage workers.
Moving forward, a working group will be formed to perform a deeper dive on the issues discussed during this meeting.
To view one of the presentations given during the meeting, click any of the below: