Workers often confused about sharing economy income taxes, study finds

Research suggests that many people who earn money through on-demand platforms make errors in reporting or paying taxes, which can bring serious penalties.

For many people in Los Angeles, the sharing economy provides an important source of side or primary income. In 2014, over 2.5 million people throughout the United States used on-demand work platforms that are headquartered here in California, such as Lyft, Airbnb and Uber, to earn income, according to The Seattle Times. By 2020, experts project that an additional 7 million people will provide services and earn money through these platforms.

Unfortunately, for many people, this novel source of income can cause confusion about tax liability. Recent research suggests that many sharing economy workers may be at risk for making mistakes in reporting their income and paying their taxes, which may lead to serious Internal Revenue Service tax penalties.

Income reporting issues

The study from American University, which used survey responses from 40,000 people who earn income through self-employment, found that sharing economy income often goes unreported and therefore untaxed. This may happen due to several factors, including the following:

  • Lack of income tax withholding. Generally, the companies that run on-demand platforms do not withhold taxes from the money that they pay to their service providers.
  • Confusion on the part of workers. Many of the surveyed individuals stated that they felt uncertain about the necessity of reporting sharing economy income or the correct method of doing so.
  • Absence of 1099-K forms. Less than one-third of the surveyed workers received a formal yearly earnings statement from the company running the platform.

Under current IRS guidelines, companies that operate on-demand platforms and take payments via credit card do not always have to report a service provider's income. A person must complete over 20 transactions through the platform and earn at least $20,000 before the company must send a 1099-K form. Consequently, many sharing economy workers may not even know exactly how much income they need to report and pay taxes on.

Potential ramifications

People who fail to report all of their income or pay appropriate taxes may face various serious consequences. For example, when a person's income is understated unintentionally, the IRS may assess a penalty of 20 percent of the unreported amount. If the IRS finds that under-reporting is fraudulent, it may claim a penalty of 75 percent of the unpaid amount. Additionally, workers may be at risk for penalties on back taxes or missed estimated tax payments.

The Fiscal Times notes that the IRS has recently acknowledged the difficulties that sharing economy workers may face in understanding their tax liability. To address this issue, the organization has launched a new website containing resources to help these workers familiarize themselves with the relevant laws. Still, people who are not aware of this resource or the unique issues associated with their income may continue to make mistakes.

Anyone who faces IRS audits or penalties as a result of accidentally under-reporting income or failing to pay taxes should consult with a tax attorney about options for resolving the matter.