Failure to Contribute: An Estimate of the Consequences of Non-and Underpayment of Self-Employment Taxes by Independent Contractors, and On-Demand Workers on Social Security
47 Pages Posted: 6 Nov 2018
Date Written: September 30, 2018
Over the past ten years, companies such as Uber, Etsy, Lyft, Airbnb, Care.com and Rover.com have become household names by connecting service providers and sellers with consumers online and through app-based programs. And this work is projected to continue to grow, along with the technology-enabled convenience of accessing goods and services through apps on smartphones in this new sector of the economy (referred to as the “On-Demand Economy” in this Report). Although it is not new that self-employed workers have tax compliance and reporting issues, the existing reporting rules applicable to most workers earning income working with On-Demand Economy platforms (e.g., Uber, Airbnb, Etsy) substantially increase the likelihood that these taxpayers fail to contribute to Social Security and Medicare through payment of Self-Employment tax (SE tax). This Report sheds light on the Social Security implications of the current federal tax rules for independent workers generally, and in particular, workers earning income through occupations occurring in the On-Demand Economy through estimating the population and earnings of these workers using the U.S. Census Bureau redesigned Survey of Income and Program Participation (SIPP).
Ultimately, we found that:
• According to SIPP, approximately 7.1 million individuals were Independent Contractors and 3.12 million individuals were On-Demand Workers in 2014.
• Using SIPP data, we estimate the collective earnings of Independent Contractors were approximately $204.1 billion dollars 2014, while On-Demand Workers collectively earned approximately $35.97 billion dollars in 2014.
• Based on our review of SIPP data and existing measures of misreporting self-employment income, we estimate at least 3.1 million Independent Contractors underreported self-employment income in 2014. This underreporting would result in approximately $4.84 billion in unpaid SE tax, with approximately $3.92 billion constituting non-payment of Social Security contributions.
• Using SIPP as well as existing research on tax compliance and information reporting for On-Platform workers and the self-employed, we estimate that as much as $2.51 billion in unpaid SE tax by On-Demand Workers in 2014. This translates to approximately $2.03 billion not paid into Social Security in 2014.
• Our estimates of likely additional SE Tax owed by Independent Contractors generally and, more specifically by workers in the On-Demand Economy due to current information reporting rules, directly undermines efforts to fund Social Security and could translate to lower Social Security benefits for these workers upon retirement. While our estimates are illustrative rather than definitive, they are intended to highlight the immediate need for (i) additional research on the tax compliance of these workers; and (ii) legislative action to combat extensive underreporting of SE tax by these populations.
The research on measuring these workers is dynamic, but there appears to be consensus that On-Demand Workers are a population that is hard to measure in terms of size, composition and earnings. However, even with conservative estimates on the underpayment of SE tax, there remains a significant—if not multi-billion dollar—probability that millions of the workers we estimated are not paying into Social Security. This a particularly acute problem for women, who tend to have greater dependency on Social Security and lower contributions over the course of their working lives. And this problem will continue to grow along with the digitizing of the cash economy. However, there are limited steps Congress can take to modernize information reporting, update quarterly-estimated payment requirements and to require distribution of tax guidance to help address these issues and further support the solvency of Social Security.
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