Taxes

Tax Reporting for Independent Contractors by Online Hiring Platforms

Stephen Fishman
Tax expert and contributor MileIQ

Today, millions of Americans obtain work in the gig economy. They sell their services through online hiring platforms like Uber, Lyft, TaskRabbit, and UpWork. Usually, payment for such gig workers' services transact through the platform.  The vast majority of gig workers classify as independent contractors (ICs). That is, they are not the employees of the hiring platform or their clients or customers. Since they are not employees, the hiring platforms they work with do not issue IRS Form W-2, the form employers issue to report the amount employees are paid.

Two forms of information returns

To help find out about payments to ICs, the IRS has created information returns. Those who hire or pay ICs file information returns to the IRS. There are two main information returns the IRS uses for reporting of payments to independent contractors, including gig workers.  Client or customer payments paid directly to an IC by check, cash, and direct deposit payments, use Form 1099-MISC, Miscellaneous Income.  Third-party payment processors like PayPal, use Form 1099-K, Payment Card and Third Party Network Transactions, for electronic and credit card payments and payments.  By far, the most important for gig workers is Form 1099-K because they ordinarily receive payment by the hiring platform, not their clients or customers. That is, the clients or customers pay the platform which in turn pays the worker. The platform charges the gig worker a fee or percentage for each job obtained through the platform.  Unlike Form W-2, which is filed for every employee, information returns don't get filed for every independent contractor. Complex rules determine when filing information returns occur. The tax law provides that "third party settlement organizations" (TPSOs) like PayPal, Amazon Payments, and Square (also called third-party payment processors) must file a 1099-K only if a person:

     
  • Receives electronic payments of over $20,000 during the calendar year, and
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  • Has more than 200 payment transactions during the year.

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What is a third-party payment processor?

Many hiring platforms, including Uber and UpWork, consider themselves to be third-party payment processors and follow these reporting rules. However, it has not been entirely clear if these platforms qualified as TPSOs (third-party scaling organization).  Now, the IRS has said that a typical online hiring platform does qualify as a third-party settlement organization. This¬†statement requires the platform to file a 1099-K only if a gig worker earns over $20,000 and had more than 200 transactions during the year.  Moreover, the IRS said that each service provided by a gig worker constitutes a single transaction. Even if multiple clients or customers submit payment for the same service. For example, there would be only one transaction if an Uber driver drives two people at one time, even if each pays separately. (PLR 201836008)  This ruling by the IRS is a private letter ruling. In other words, it does not have the force of law. But it does provide excellent guidance on how the IRS believes the tax reporting rule should apply to online hiring platforms.

Report all your income to the IRS

Here's the key point in all this: Most gig workers don't earn enough money or have enough transactions for filing a 1099-K by a hiring platform. Indeed, one recent survey found that 74 percent of all gig workers earn less than $5,000 per year.  That means the IRS doesn't know how much most gig workers get paid. However, it's important to understand that even if the money you earn as a gig worker goes reported to the IRS on a 1099-K filed by a hiring platform, you as a taxpayer, must report all your gig income on your tax return.

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