Tax reform must help workers in America’s new sharing economy

As the tax writers of the House Ways and Means Committee meet this week to ponder amendments to the Tax Cut and Jobs Act, they would be well advised to consider adopting an amendment likely to be offered by Rep. Tom Rice of South Carolina, a version of the New Economy Works to Guarantee Independence and Growth Act, his bill that seeks to clarify the classification of workers in the new sharing, or “gig,” economy.

Rice introduced his bill just two weeks ago, in late October, but the idea has been around for some time. Sen. John Thune of South Dakota introduced an identical bill in the Senate in July. Thune and Rice are both well positioned to push for incorporation of their legislation into either or both of the bills to be written by the House Ways and Means Committee and the Senate Finance Committee. Rice is a member of Ways and Means (in fact, he was named to fill the committee vacancy created by Paul Ryan’s rise to the speakership), and Thune is a member of Senate Finance.

{mosads}Their bill would address concerns related to a segment of the economy that didn’t even exist the last time the tax code was reformed back in 1986. Now, according to Harvard researchers, there are more than 24 million Americans engaging in what they call “alternative work arrangements,” including temporary workers, on-call workers, independent contractors, and freelancers. That number is growing every year as more and more entrepreneurs devise new business models.

The bills are meant to settle two problem areas in tax administration created by the rise of the sharing economy. First, they aim to clarify that Uber and Lyft drivers, Grub Hub and Saucey delivery people, and Glam Squad stylists, among others, are independent contractors rather than employees. Second, the bills ease the tax hassles faced by these gig economy independent contractors, many of whom learn for the first time that tax treatment of independent contractors, whose income is reported to the IRS on a 1099 form, is very different from tax treatment of hourly wage and salaried employees, whose income is reported to the IRS on a standard W-2 form.

For instance, many first-time independent contractors, who are typically engaging in the gig economy on a part-time basis for additional income rather than as their primary source of income, learn they’re required to make quarterly tax payments on their income, rather than have their taxes withheld. Unfortunately, some of them learn the hard way, only after they file their taxes in April and discover they’ve failed to pay estimated taxes earlier, and consequently, they get hit with penalties and interest on those penalties. The solution? Withhold estimated taxes from some of these independent contractors. That will also allow the IRS collect more of the taxes that are actually due and owed, at least some of which is currently going uncollected simply because independent contractors are unaware that they owe it.

In the final analysis, our tax laws not only need to be reformed, they need to be updated to reflect today’s economy. More and more people are working multiple jobs as independent contractors because it fits their schedule, their lifestyles, and their financial needs. They can spend their mornings doing graphics or website design, then spend their afternoon driving for Uber or Lyft, and then deliver groceries for Instacart in the evening. The legislative language proposed by Sen. Thune and Rep. Rice would simplify the tax code for gig economy companies and their independent contractors, and therefore incentivize more people to participate and succeed in these new jobs. There’s no cost to taxpayers, and it’s true reform.

Jenny Beth Martin is chairman of Tea Party Patriots Citizens Fund.