For the first time in over 30 years, Congress is seriously attempting to overhaul the tax code. While much of the discussion has focused on tinkering with tax rates, deductions and credits, more fundamentally, this overhaul represents an opportunity to simplify the way modern Americans live and work.
If Congress is smart, it will keep an eye to the future and develop a framework that can adapt to the more flexible work arrangements that comprise a growing portion of our economy. Congress can take a positive first step in this direction by including Sen. John ThuneJohn Randolph ThuneThune endorses Herschel Walker in Georgia Senate race Democratic frustration with Sinema rises Senate Republicans raise concerns about TSA cyber directives for rail, aviation MORE’s (R-S.D.) “New Economy Works to Guarantee Independence and Growth” (NEW GIG) Act in future versions of the tax bill.
This new bill focuses on integrating the gig economy (think Uber, TaskRabbit, Handy, etc.) into our tax system without compromising the worker independence that makes this new sector of the economy so valuable. These temporary, usually part-time jobs allow independent contractors to pick their own work schedules and conditions while being matched with consumers, usually via an app or web service.
As these on-demand services have grown tremendously over the past decade, it’s quickly become apparent that the current tax structure causes needless confusion when applied to the gig economy. Ambiguity surrounding how to classify income and work expenses has forced gig economy workers to consult expensive tax experts or risk huge fines, this ambiguity also hampers the government’s ability to collect consistent revenue. Unlike employees who get relatively simple W2 tax forms, independent contractors receive more complex 1099 forms, are responsible for filing quarterly revenue reports with the IRS once they reach certain profit thresholds, and for breaking out the various Social Security, Medicare, and income taxes themselves. For workers just trying to pick up a small side job this can be understandably confusing.
Several class-action lawsuits against transportation network companies like Uber and Lyft have added to the confusion by attempting to fit the square-peg gig economy into the round hole “employee” status. But forcing requirements like minimum wage, overtime pay and unemployment insurance onto gig economy employers doesn’t make sense in a situation where workers, not employers, are largely in control. Furthermore, adding the cumbersome regulations that come with some of these mandated employee benefits would undermine the very flexibility that workers find so refreshing about the gig economy.
The NEW GIG Act would help resolve these issues by clarifying worker classification standards and creating a safe harbor for those claiming independent contractor status — a tax status covering most of the freelance-style work that characterizes the gig economy. By laying out a clear set of criteria required to claim contractor status for income — and employer — tax purposes, the bill helps settle the uncertainty surrounding how to classify gig economy workers. The act also requires the owners of many gig economy businesses withhold income tax from their contractors, a provision which should make filing taxes much easier for individual workers.
Adapting our tax code for more flexible work arrangements, like those in the gig economy, is one of the simplest things we can do not only to help our economy today, but to prepare for future economic upheavals. For example, with increasing automation on the horizon, traditional 40-hour-a-week employment situations could fit the needs of fewer workers than it once did. Gig-economy jobs provide easy opportunities for part-time pay that help ease the transition for technologically displaced as workers can earn money while retraining or applying for new jobs. Simplifying the tax-reporting burden will help more workers facilitate this switch.
The American work environment will continue to evolve, and so should our tax code. No one can predict for sure what employment will look like decades from today, but we should not allow a tax code last overhauled in 1986 to dictate our notion of work today and in the future.
If Congress is serious about rewriting the tax code, it will not simply design a new system around an outdated understanding of our economy. Making sure the IRS recognizes flexible work arrangements is an easy step towards a better future. Ensuring the language in Thune’s NEW GIG Act makes it into the final bill will do just that.