Tax reform for the growing gig economy

As Congress debates tax reform, we hear lots about the middle class, corporations, and the 1 percent, but we haven’t heard much about the gig economy, and we should.

What is the gig economy? Do you include independent contractors, consultants, and freelancers? Temp agency and on-call workers? Workers on a company contract? People involved in these work arrangements account for 30 million workers or about 20 percent of the labor force; a number that is growing at a rate faster than general total employment. If you include people who do some very part-time independent work, you end up with about 70 million people involved in the gig economy, or 36 percent of the workforce.

{mosads}That does not even take into consideration the ease of creating new online marketplaces or the rise of hundreds of new online platforms that fuel a flourishing, on-demand economy. Our reality is an economy with a very large sector of the labor force that is structurally different from that of the last century. We have a new era workforce of self-employed entrepreneurs, and the new structure demands new institutions.

While these platforms have inspired new thinking around how companies are disrupting commerce and solving age-old logistical problems, the U.S. tax code has not seen meaningful reform in over 30 years. This leaves the new era workforce of self-employed business owners operating under tax policies that are designed for the 20^th Century. While these trends may be good for some, the possibility is real that the growing disconnect will result in a race to the bottom for other entrepreneurs. We must not further disadvantage those already facing challenges to starting a business, such as lower/moderate income populations, minorities, and women. When we update our institutions, it’s imperative that we consider the needs of every entrepreneur.

A Kogod Tax Policy study, “Shortchanged,” found that the current tax system doesn’t work for the gig economy. On-demand entrepreneurs share a common challenge: overcoming tax and reporting requirements that treat them as if they are conventional small businesses when they simply aren’t. Nor does it work for the IRS as the collection mechanisms are inefficient. Interestingly, this new workforce is not necessarily looking to reduce the tax rates. A survey by Thumbtack, an online platform where professionals offer their services, found that 70 percent of their users think the top corporate income tax bracket of 35 percent is “about right” or too low, with 30 percent believing the corporate rate is too high. In reality, what these self-employed business owners want is simplification.

The House Small Business Committee is on the right track with H.R. 3717, the Small Business Owners’ Tax Simplification Act, with a similar bill being discussed in the Senate. The bill would make several changes that would provide simplification and clarity to the tax code for entrepreneurs and startups; it would allow for voluntary withholding agreements and training services through the platforms without impacting a worker’s classification status and enable these business owners to participate in Cafeteria Plans or flexible spending accounts.

When we’re updating the tax system to accommodate the gig economy, we need to consider policies that encourage economic activity and promote the survival, growth and innovation of micro-businesses and the self-employed. Expanding the EITC to the self-employed, letting VITA sites help with Schedule C filings, allowing the self-employed to deduct health expenses from their business income, and ensuring a strong taxpayer education effort through the IRS and other federal programs are just a few examples of the many policies that would help all entrepreneurs, including the lower-moderate income ones.

It’s not only the tax system that needs updating. Gig economy workers/entrepreneurs often lack access to benefits and protections traditionally provided by employers, such as workers’ compensation, retirement savings, paid leave and health care. Existing student loan and mortgage structures do not accommodate for the potential income volatility that gig workers face. Updating government programs to support this modern workforce is essential. We need to invest in the human capital and entrepreneurial training that will be the driver of future jobs. We need to ensure that affordable capital is available so that these entrepreneurs can grow their businesses.

To align with today’s reality, these systems need to be updated so that the new era workforce succeeds. We have the opportunity to create an economy that works for a new workforce of self-employed entrepreneurs. Let’s make sure the right pieces are in place so that our economy can foster independent workers and micro-business owners while creating a sustainable, self-reliant and thriving economy.

Heidi Pickman is Communications and Policy Director of California Association of Micro Enterprise Opportunity.