The gig economy has come to include an even larger sector of the working population amidst the Coronavirus pandemic. With companies such as delivery services scrambling to meet the increased need for things like food and toilet paper due to quarantining households, an estimated 1 in 10 workers is now relying on gig income, according to CPA Practice Advisor. With the end of the fiscal year, many contracted employees are beginning to gather information to begin working on their taxes, and gig platform companies can help.
The requirements for reporting gig work income can be difficult to discern. Non-employees must receive either a Form 1099-K or Form 1099-NEC to use in preparing their federal taxes. A Form 1099-NEC is issued when the worker has made more than $600 in a calendar year. 1099-K applies when the non-employee has made $20,000 or more and their income has been split into 200 or more transactions.
Unfortunately, while these guidelines hold true on a federal level, different states have different rules for taxation. In Pennsylvania, for example, the form 1099-K threshold is $5,000 and there is no transaction limit. In Vermont, the form 1099-K threshold is only $600 and there is no transaction minimum.
These differing rules between states can make it difficult for gig workers to determine how much they owe and unfortunately, not paying the proper amount of taxes can lead to IRS penalties.
How Companies Can Help
Since more and more states are lowering the reporting threshold for form 1099-K, it is a good idea to get into the habit of tracking and providing wage information for non-employees. While gig platform companies send forms detailing workers’ earned incomes to their states, many of them don’t provide this information to laborers. While the burden of determining proper taxable income is ultimately left to the independent contractor, companies can help by leveraging technology to let them easily access data.
Utilizing the services of an accounting firm or technology company that offers automated tax reporting software is a great way to make tax season easier for gig workers who are working with your company. CPA Practice Advisor recommends a scalable solution that meets the following criteria:
- Able to analyze multiple streams of data
- Includes accuracy validation
- Converts transactional data into tax reportable formats
You may also want to educate workers affiliated with your company on some best-practices for taxes for independent contractors. As a general rule of thumb, it is a good idea to set 30% of income aside for taxes. Non-employees will want to keep detailed records of everything they make from different jobs and any tax-deductible expenses associated with their work. This way, they will still be able to accurately report their adjusted gross income even if they do not meet reporting thresholds for Form 1099-K.
Not only does keeping track of taxable income for non-employees futureproof your company for whatever new regulations your state has in store as the gig economy develops, it will also streamline the tax process of those working with you, encouraging them to continue their services for your business.