How to pay for tax cuts? Look to Airbnb hosts and Etsy vendors
(Bloomberg) Airbnb Inc. hosts and Etsy Inc. vendors who have avoided taxes on income from the sharing economy might have to start sharing more with the Internal Revenue Service.
Federal rules don’t require such companies to withhold any income taxes on the payments they route to people who provide services or sell items via their online platforms. The companies do have to notify the IRS about some participants’ earnings—but only if they exceed $20,000 and conduct more than 200 transactions a year.
A proposal last week from Republican Senator John Thune would lower that threshold to $1,000, providing a potential new source of billions of dollars in revenue as Congress mulls major cuts to business and individual tax rates.
“That’s going to raise a ton of money," said Caroline Bruckner, managing director of American University’s Kogod Tax Policy Center in Washington. Billions of dollars in taxable income are probably going unreported every year, Bruckner wrote in a report last year. Those uncollected taxes will probably only increase as the number of so-called platform economy workers is expected to double by 2020 to about 7 million, the study warned. “This is easily a multibillion-dollar bill,” Bruckner said.
To be sure, that’s only a fraction of the multitrillion-dollar tax cuts that congressional leaders and Trump administration officials are considering. Still, as lawmakers seek to avoid adding to the deficit, every little bit helps.
Thune’s proposal is under serious consideration and has received a detailed examination from the Joint Committee on Taxation, according to two sources familiar with the discussions. The JCT, which is responsible for evaluating the cost of tax legislation, is eager to tackle issues related to independent contractors, one of the people said.
“It’s a small piece but something that could very well fit nicely in a tax reform package,” said Dean Zerbe, a former senior counsel to the Senate Finance Committee, who hasn’t been involved in the discussions.
Companies in the sharing economy—such as firms that provide home repairs and food deliveries—link buyers with workers who the companies label as independent contractors rather than formal employees. Because the companies process payments, IRS rules say they only need to report revenue exceeding the $20,000 threshold. The rule applies only to companies that get paid by credit card.
“My legislation would provide clear rules so these freelance-style workers can work as independent contractors with the peace of mind that their tax status will be respected by the IRS,” Thune said in a statement. His office declined to comment further.
Uber Technologies Inc. reports drivers’ income to the IRS and the drivers themselves, regardless of the amount earned. Lyft Inc. does so when gross income exceeds $600 annually. Uber didn’t respond to requests for comment. Spokeswomen for Lyft and Etsy declined to comment on Thune’s proposal.
“While we’re evaluating this proposal, we have always made it clear to every Airbnb host that they must pay taxes,” said Nick Papas, a spokesman for the home-rental company. “We regularly communicate with our hosts to remind them about tax rules and have a dedicated section on our website where hosts can get all the information they need to meet their obligations.”
Contractors are generally responsible for paying taxes out of their own pockets, but Thune’s bill would also require sharing economy companies to withhold 5 percent of contractors’ payments—up to $20,000—and deposit those payments with the IRS. The funds would be treated like an estimated tax payment by the company.
Adapting to the bill’s requirements would not “be a significant issue at all” for the companies, said Arun Sundararajan, a professor at New York University’s Stern School of Business and author of “The Sharing Economy.”
About 60 percent of 518 sharing economy workers surveyed in 2016 said they didn’t receive the forms that would notify the IRS of their earnings, according to Bruckner’s report.
“It’s arbitrary and inefficient to legislate that a guy who drives a taxi for a taxi company faces different rules, different benefit requirements, has taxes on wages withheld than a guy who does an identical job but whose employer gets to claim that he’s a contractor,” said Adam Looney, a senior fellow at the Brookings Institution.
Another provision in Thune’s proposal would ease the reporting requirements for more traditional independent-contractor relationships. Businesses that hire those workers directly—such as FedEx Corp.—would only have to report payments that total more than $1,000 a year, instead of $600 as the current rule requires. That change could reduce some of the revenue generated by the lower threshold for independent contractors in the sharing economy, Zerbe said.
“FedEx supports legislative efforts that bring greater certainty to businesses large and small and that encourage entrepreneurial pursuits—such as small business ownership—that have proven to be the growth engine of the economy,” Jack Pfeiffer, a FedEx spokesman, said in an email.
Companies “want clarity without paying too much of a tax price,” said George Yin, a former Senate Finance Committee tax counsel. “That’s part of the balance of the bill.”