Because of the recent rise of platform gig work, more U.S. workers are being compensated via self-employment. Their earnings are not subject to tax withholding but are generally covered by information reporting on 1099 tax returns. In a new study, researchers explored what happened when the reporting threshold for many gig workers suddenly rose from $600 to $20,000.
The study was conducted by researchers at Carnegie Mellon University, Michigan State University, the University of Chicago, and the Internal Revenue Service (IRS). It is published in the Journal of Public Economics.
"In 2017, as a result of a policy change, many gig workers with low to moderate earnings suddenly and unexpectedly stopped receiving a 1099 for their work," says Andrew Garin, assistant professor of economics at Carnegie Mellon's Heinz College, who led the study. "This raised the question: How did this affect what these workers report to the IRS on tax day?
"The answer matters for both the IRS's ability to collect revenue and our ability as researchers to measure the size and scope of the gig economy."
Researchers examined how a gap in information reporting for gig economy payments between $600 and $20,000 after the adoption of the 1099-K return (used for third-party network transactions) affected individual tax filing behavior and the overall reporting of gig work more generally. Using state-level information returns for Massachusetts and Vermont, where the reporting threshold remained at $600, merged with federal tax returns filed with the IRS, they compared platform workers who lived in the same labor market but on opposite sides of the Massachusetts border.
For every dollar in gig payments no longer reported on a 1099 return, gig workers self-reported 17 cents less in self-employment net earnings on their own tax returns, the study found.
Researchers then used state-level filings to attribute the size of the national online platform workforce in 2017 and 2018. They estimated that 770,000 gig workers did not receive information returns due to the change in third-party reporting practices by online platforms and that as a result, $560 million in profits went unreported on income tax filings.
"Policymakers are actively adjusting information reporting requirements but there is limited evidence on how such changes affect taxpayers' behavior," notes Emilie Jackson, assistant professor of economics at Michigan State University, who coauthored the study. "In the past few years, new rule changes mean that millions of additional freelancers will no longer be subject to 1099 reporting. Our findings offer new evidence about how these changes might affect federal revenues in the coming years."
