1099-K Threshold and California AB5 Dominate GCS San Francisco Discussions

October 1, 2019
Wendy Walker

The threshold for reporting income on Form 1099-K is increasingly proving to be too high for reducing the tax gap at both state and federal levels, and the problem will only get worse as the gig economy grows.

Form 1099-K and California gig workers dominated discussion at the mid-September GCS conference in San Francisco. The timing of the conference was exceptional, with California having just passed AB5, a law that would categorize many gig workers as employees rather than contractors

The gig economy is in focus right now not only because of the growth of applications and websites focused on having non-employees provide services but also because of signs of an impending recession. One GCS panel noted that 40 of U.S. workers, or 60 million Americans, live paycheck to paycheck. In an economic downturn, 8-10 percent of those workers will likely wind up unemployed. Needing income, those workers are likely to turn to providing gig services, which will accelerate the growth of the gig economy.

A move toward non-employee workers 

In general, even without a recession, there is a trend in the U.S. toward non-employee relationships. A GCS panel cited Google as having been made up of about 10-15 percent non-employees in 2010 but almost 50 percent non-employees in 2019. The growth of the gig economy gets the government’s attention because of the Form 1099-K reporting threshold, which is currently $20,000 earned and 200 transactions completed by a worker in a year. 

The average gig economy worker makes $17,000 per year and falls below the threshold. That means gig platforms don’t report those workers’ incomes, and workers are, as a result, far less likely to pay taxes on that income because gig platforms don’t report it to the IRS. Many workers don’t even realize they owe taxes. There are more than 350 gig or sharing platforms in existence, so the gig economy is very much present and growing as a force in the U.S.

The growth of the gig economy concerns governments for two reasons: A high reporting threshold keeps the tax gap large, and failure by gig workers to pay self-employment taxes contributes to ongoing retirement and social security deficit issues. For tax professionals, the reporting threshold is the issue that is likely to cause the most disruption. 

Form 1099-K reporting thresholds and California AB5 

Some states, including Vermont and Massachusetts, have lowered reporting thresholds to $600 earned annually with no minimum number of transactions. Those states have experienced massive growth in 1099-K reporting. California proposed such a measure in February but has not moved forward with it yet. California has motivation to rethink the gig economy. The state received less than 5 percent of the income projected from gig workers in 2015, one GCS panel noted. 

What California has done with AB5 is establish a three-part test that would recategorize many gig workers as employees. A similar bill is in the House at the federal level. While that bill also establishes a three-part test, the parameters are different from those adopted in California. 

And even in the California legislation, exemptions and exceptions exist. One GCS panel suggested that California employers review exemptions carefully; some of the language applies to broad groups of workers, so employers may need to consult with experts to determine classification. At a minimum, every California employer–not just gig platforms–needs to undergo a review of its non-employee relationships and apply the new test to ensure compliance.

Effect of California AB5 on federal tax reporting unknown 

Exactly how the difference between California and federal worker classifications will affect tax reporting is unknown at this point. Gig companies based in California have pledged to fight the new law, as they see it as a threat to their business models. The New Gig Act of 2019, the US House bill, prescribes a broader test for workers as well as a voluntary withholding tax regime that are different than the details currently outlined in the new California law.

At this point, the only certainty with both 1099-K reporting and California AB-5 is uncertainty. Companies need to partner with a solution provider that can navigate changes in tax policy, and can both help mitigate risk and avoid surprises. 

Take Action

Educate yourself. Empower your business. Engage with your community. Register now for GCS Intelligent Reporting Summit San Antonio! 

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Wendy Walker

Wendy Walker is the principal of Tax Information Reporting solutions at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase. Wendy has served as a member of several prominent industry advisory boards. She graduated with a BS in Process Engineering from Franklin University and earned her MBA from Ohio Dominican University, in Columbus, Ohio.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

ShipCompliant United States
June 4, 2020
Granholm: 15 Years of Shipping Wine…and More

How much can change in fifteen years?  It was May 2005 when the U.S. Supreme Court issued a ruling in Granholm v. Heald, one of the most consequential beverage alcohol-related cases the Court has heard. The case challenged laws in Michigan and New York that permitted in-state wineries to make direct-to-consumer (DtC) shipments to their […]

EMEA Tax Compliance VAT & Fiscal Reporting
June 4, 2020
European Court Rules Against UK on VAT Treatment of Futures Trading

In the midst of ongoing negotiations following the UK’s exit from the European Union (EU), the Court of Justice of the European Union (CJEU) has ruled that the UK has impermissibly expanded the scope of its 0% VAT rate on futures trading.  And, that this has been occurring over a period spanning more than forty […]

ShipCompliant United States
June 3, 2020
4 Steps to Get Started Shipping DtC

Direct-to-consumer (DtC) shipping of beverage alcohol products is a $3 billion dollar market that continues to grow annually. DtC shipping can be a great way to grow your business by reaching new audiences, expanding your customer base, and increasing your sales. But, before you can take advantage of this growing market, there are some steps […]

E-Invoicing Compliance LATAM Tax Compliance VAT & Fiscal Reporting
June 3, 2020
Latin America: An Update on E-Invoice Requirements

In the field of global e-invoicing and tax control, most eyes have been focused on trailblazing initiatives in Asia, as countries such as India, Vietnam and Thailand look set to introduce new reforms in this area. However, even in the home of mandatory digital tax controls – Latin America – where mandatory clearance of B2B […]

EMEA IPT Italy Tax Compliance
June 3, 2020
Italian Parafiscal Complexities

Premium tax and parafiscal compliance for insurers authorised to operate under the Italian regime can be challenging. For the experienced, it may seem that each year brings a different obligation to be met with new requirements often being introduced. There are almost always links between an upcoming year’s reporting requirements and declarations made in previous […]