Shortchanged
The Tax Compliance Challenges of
Small Business Operators Driving
the On-Demand Platform Economy
Written by Caroline Bruckner,
Managing Director, Kogod Tax Policy Center

 Executive Summary
The last time Congress enacted substantial
tax reform—in 1986—only 8.2% of American
households owned personal computers.
Today, more than 87% of American adults
own a mobile phone and on-demand
platforms like Uber, Etsy, Lyft, Airbnb,
HomeAway, Amazon, and TaskRabbit have
become household names by connecting
businesses and consumers. Although millions
of Americans are engaging in the on-demand
platform economy every day as sellers
and service providers, the tax compliance
challenges this new frontier presents have
gone relatively unnoticed. At the same time,
these challenges will grow with this fastest
growing segment of the labor economy—
creating unnecessary and ongoing burdens
for the small business operators who power
the on-demand economy.
This report, in keeping with the mission
of the Kogod Tax Policy Center to conduct
non-partisan research on tax issues specific
to small businesses and entrepreneurs,
identifies the tax compliance challenges the
on-demand economy presents for its small
business operators. Having spent more than
a year investigating this growing problem, we
report that:

1

•  More than 2.5 million U.S. taxpayers are
participating in the on-demand platform
economy as small business owners every
year, and that number is set to more
than double in the next few years.
•  At best, these small business owners are
shortchanged when filing their taxes;
at worst, they fail to file altogether. In
addition, these taxpayers face potential
audit and penalty exposure for failure to
comply with filing rules that are triggered
by relatively low amounts of earned
income and inconsistent reporting rule
adoption.
•  The current tax administration system
isn’t working for a significant percentage
of these small business taxpayers or
Treasury or IRS. The existing tax rules
effectively create a $19,399 reporting tax
loophole impacting millions of taxpayers
(the difference between the income
thresholds triggering Forms 1099-K
and 1099-MISC reporting), resulting in
widespread confusion among taxpayers.
•  The current state of play is one of
unnecessary burden, potential audit
and penalty exposure for on-demand
platform economy players. We can do
better.

 Introduction
The last time Congress enacted substantial tax
reform—in 1986—only 8.2% of American households
owned personal computers.1 In 2014, 87% of American
adults owned a mobile phone, of which 71% were
smartphones (Internet-enabled).2 Companies like Uber,
Etsy, Lyft, Airbnb, HomeAway, Amazon, and TaskRabbit
have become household names by connecting
businesses and consumers through online and appbased platforms. In the past 10 years, the Internet and
smartphones have fundamentally changed the way
Americans purchase goods and services in cashless
transactions. Today, we book travel with our thumbs.
Since its launch in 2008, Airbnb hosts have
accommodated more than 60,000,000 guests worldwide.
In the United States, the overall Airbnb host community
has grown 85% year-over-year, with the typical host
earning $7,350 in supplemental income per year on just
a single property.3 As of February 2016, Uber reported
that it has more than 500,000 drivers, who earned
more than $3.5 billion in take home wages in the first
three quarters of 2015.4 Data from the first major
study of the “on-demand platform economy” using
financial transactions found that in the last three years,
an estimated 10.3 million people earned income from
being either service providers or sellers using an online
platform intermediary.5

More than 2.5 million Americans are earning income
by renting rooms, giving rides, running errands,
and selling goods as small business owners every
month.6 What’s more, the explosive growth of
the on-demand platform economy is the latest
example of a 66.5% increase in alternative work
arrangements for U.S. workers from 14.2 million in
2005 to 23.6 million in 2015.7

But while the on-demand platform economy has
experienced extraordinary growth since its inception,
surprisingly little has been done to understand the tax
compliance challenges this new frontier presents, or how
the on-demand platform economy impacts Treasury
and IRS’ ability to fairly and efficiently administer the
U.S. tax code.8 This report, in keeping with the mission
of the Kogod Tax Policy Center to conduct non-partisan
research on tax and compliance issues for small

businesses and entrepreneurs, targets the tax challenges
of the on-demand economy’s small business operators
and endeavors to shed light on these issues as Congress
looks to move forward with tax reform.
Having spent more than a year investigating this growing
problem, we report on what the existing Congressional
tax reform debate has yet to acknowledge: that, for
tax purposes, on-demand platform economy service
providers and sellers are, in fact, small business owners.
And there are millions of them working and earning
income in ways that are not readily identifiable by
existing government research. In particular, we explore
why it’s tough to measure how pervasive the tax
problems of these small businesses are because existing
government research and methodologies for measuring
the smallest of small businesses fall short.
We start by explaining just how pervasive the ondemand platform economy has become for consumers
and the labor market, and the tax compliance challenges
that go along with trying to adapt a twentieth-century
tax code to a twenty-first century economy. We argue
that these issues should be addressed—not only
because millions of American taxpayers are needlessly
burdened trying to comply with an antiquated, outdated
tax system—but also because inaction has very real
implications on Treasury and IRS’ ability to fairly and
efficiently collect taxes.
Our Approach, Data & Methodology
In the course of conducting this research and drafting
this report, we reviewed the existing academic and
industry literature and surveys on the on-demand
platform economy as a first step in approximating just
how many millions of U.S. taxpayers are earning income
as its small business operators. We compared data
sets, research criteria and findings of the latest studies,
searching for commonalities to provide insight as to
why estimates of the number of U.S. taxpayers earning
income as service providers and sellers in the ondemand platform economy vary so widely. We reviewed
existing government research (e.g., publicly available
taxpayer filing data, U.S. Census Bureau (Census) data,
Bureau of Labor Statistics (BLS) data, U.S. Government
Accountability Office (GAO) reports, U.S. Department
of Treasury (Treasury) technical papers), and identified

2

 the limitations in the existing government research
with respect to identifying and tracking those small
businesses participating in the overall economy.
We then talked to federal government economists at
Treasury, the Small Business Administration Office
of Advocacy (Advocacy), and GAO as well as other
agency officials responsible for studying and writing
government research on small businesses, the selfemployed and economic trends as well as taxpayer filing
data. We consulted the National Taxpayer Advocate and
tax preparer industry experts directly to understand
what hurdles and frustrations this group of small
businesses face as they navigate their way through tax
filing season. We conferenced with on-demand platform
company executives, industry experts and academics
to solicit their views on both the extent to which U.S.
taxpayers are operating in the on-demand platform
economy and how those numbers are projected to grow
over the next decade.
Finally, we talked to more than 50 individuals
currently participating in the on-demand economy
and administered our own survey of members of the
National Association of the Self-Employed (NASE).
Our survey was designed to gauge existing self-identified
self-employed workers’ participation in the on-demand
economy (e.g., how many hours worked; how much
income earned) as well as respondents’ understanding
of their tax filing obligations (e.g., whether respondents
kept records for their expenses or received a Form
1099 from their on-demand platform company). We
conducted the survey Mar. 10, 2016 through Apr. 1,
2016, through email invitation sent to members by
NASE. We received 518 completed responses from
the approximately 40,000 NASE members invited to
participate in the survey, which constitutes a statistically
representative sampling size of NASE members.
Our intention in conducting the survey was not to
prepare a statistically reliable estimate of the entire
American population of the self-employed or freelancers
or all workers in the on-demand platform economy,
but rather to assess whether tax compliance challenges
exist—even among a group of taxpayers, who, by
their own self-selection as members of NASE, are selfemployed small business owners. 9

3

Ultimately, we concluded that:
1.  More than 2.5 million U.S. taxpayers are
participating in the on-demand platform
economy as small business owners every year,
and millions more are set to join their ranks in
the next decade.
2.  For tax purposes, on-demand economy service
providers and sellers are small businesses
owners, but their numbers aren’t reflected
in government data designed to track small
business owners. In fact, these taxpayers don’t
necessarily realize they are small business
owners until tax time or they receive an IRS
notice.
3.  At best, these small business owners are
shortchanged when filing their taxes; at worst,
they fail to file altogether. Approximately onethird of our on-demand platform operator
survey respondents didn’t know whether they
were required to pay quarterly-estimated
payments and almost half were unaware of any
available deductions, expenses or credits they
could claim to offset their tax liability. These
taxpayers face potential audit and penalty
exposure for failure to comply with filing rules
that are triggered by relatively low amounts of
earned income. Compounding this problem is
inconsistent reporting rule adoption that results
in widespread confusion among taxpayers.
4.  The current tax administration system isn’t
working for a significant percentage of ondemand platform small business operators or
Treasury or IRS. More than 60% of our survey
respondents who worked for an on-demand
platform company in 2015 reported that they
did not receive a Form 1099-K or Form 1099MISC from their on-demand platform, which
likely means the IRS didn’t either. The current
state of play is one of unnecessary burden,
potential audit and penalty exposure for ondemand platform economy players. We can do
better.

 PART I

Defining the Relationship: Airbnb is
not Instagram and Other Measurement
Challenges
According to the latest industry statistics, as of January
2016, there were more than 3.97 million apps available
for download across several different platforms (e.g.,
Microsoft, Google, Amazon) that generate more than
$120 billion.10 But not every smartphone app functions
as part of the on-demand platform economy. Airbnb
is not Instagram—they provide completely different
services for users. Similarly, not every seller on eBay or
Craigslist sells items regularly enough to be considered a
business for tax purposes or generates enough income
in any given year to trigger a tax filing requirement.
Some online sellers just sell a couple of used items
online a couple of times a year, which generally doesn’t
trigger a tax filing requirement. At the same time, new
on-demand platforms are being introduced every
month. This acute reality presents one of the most
confounding challenges for conducting tax research
on these issues: there is no singular definition or even
consensus on how to define or measure the on-demand
platform economy or the income that small businesses are
deriving from it. As a result, estimates of the number of
small businesses operating in the on-demand platform
economy are wildly inconsistent.
For example, one recent Time Inc./Aspen Institute
survey found that more than 45 million Americans
had—at least once—worked or offered services through
a ride-sharing, accommodation sharing, task services,
short-term car rental or food/goods delivery platform.11
At the same time, other notable experts including Seth
Harris and Alan Krueger—excluding seller and home
accommodation platforms (e.g., ETSY, Airbnb)—estimate
that 1.9 million individuals are earning income as service
providers using apps.12
Still other labor survey experts have concluded that
there are more than 3.2 million Americans currently
working in the on-demand platform economy and
project that number to more than double by 2020.13
The explanation for why these estimates range so

significantly is rooted in differences in definition. As
illustrated in Table 1, including or excluding specific
platforms can vary an estimate of the size of the ondemand platform economy and its players considerably.
Given our specific focus on the tax compliance
challenges facing these small businesses, we think
it makes sense for tax policy purposes to limit our
analysis to platforms that generally reflect the following
characteristics, which were developed by the first major
study to track actual income earned using financial
transaction data:
•  platform directly connects service providers and
sellers with consumers;
•  platform processes payment electronically, using
credit credits, debit cards or mobile payments;
•  platform allows service providers to provide
services or goods at provider discretion; and
•  customers pay for a singular task or good.14
There is no question that out of a universe of 3.97
million apps, inevitably, there are some small businesses
earning income from the on-demand platform economy
that may not be captured by the foregoing criteria, but
that would be included in publicly available taxpayer
income filing data. However, Treasury has been explicit
with Congress in explaining why existing aggregate
tax data is “not very helpful in isolating trends in
the on-demand economy or in the prevalence of its
[workers and sellers].”15 In contrast, recent work using
the foregoing criteria on the income of Americans
participating in the on-demand platform economy has
identified important trends that are particularly relevant
to our report’s focus, including:

4

 •  More than 2.5 million Americans are actively
participating in the on-demand platform economy
every month, which is 1% of the adult American
population;
•  Although people do cycle in and out of the ondemand platform economy, during the months in
which people are actively using platforms to earn
income, their earnings “represented a sizeable but
still secondary source of income;”

Q1

On average, how many hours a week did you spend providing
services or selling products using the sharing economy
company platform or app?

0-10 hours per week
10-20 hours per week

20-35 hours per week
More than 35 hours per week

•  In any given month, on-demand platform income
represents roughly 20 to 30% of total income of
people actively earning income in the on-demand
platform economy; and
•  Average monthly income from active participation
ranges from $533 to $314, with the higher
amounts usually stemming from working in
connection with platforms such as Uber, Handy,
TaskRabbit (labor platforms) as opposed to other
platforms such as eBay, Airbnb (capitol platforms
or sellers and accommodation providers).16
These monthly income averages are consistent with
public reports from many of the on-demand platform
companies themselves and tend to reflect the averages
of hours worked. For example, in 2015, more than 75%
of Lyft drivers reported working less than 15 hours
per week, and more than half of Uber drivers worked
less than 10 hours per week.17 Our survey found that
among respondents with income from on-demand
economy work in 2015, 72% worked, on average, less
than 10 hours a week with their on-demand platform
company and that 92% of respondents worked less
than 20 hours per week with their on-demand platform
company.18 We also found that of respondents operating
in the on-demand platform economy, 88% earned
less than $15,000 in 2015.19 Although studies to date
have identified a core constituency of small business
operators (ranging from 25% to 30%) that tend to work
for on-demand platforms full-time and earn more, by
and large, the majority of individuals in the on-demand
platform economy work 12 hours per week.20

5

10%

20%

30%

40%

50%

Answered: 69

60%

70%

80%

90%

100%

Skipped: 452

Answer Choices

Responses

0-10 hours per week

50 (72.46%)

10-20 hours per week

14 (20.29%)

20-35 hours per week

2 (2.90%)

More than 35 hours per week

3 (4.35%)

Q2

How much income did you earn in 2015 from your work
with the sharing economy platform or app?

$100 - $5000
$5,000 - $15,000

$15,000 - $30,000
$30,000 - $75,000

More than $75,000
10%

20%

30%

40%

50%

Answered: 66

60%

70%

80%

90%

100%

Skipped: 455

Answer Choices

Responses

$100 - $5,000

49 (74.24%)

$5,000 - $15,000

9 (13.64%)

$15,000 - $30,000

3 (4.55%)

$30,000 - $75,000

5 (7.58%)

More than $75,000

0 (0.00%)

 Types of On-Demand Platform
Operators Surveyed

Examples of specific platforms
included: Uber, Lyft, Airbnb, VRBO,
HOMEAWAY, Handy.com, TaskRabbit,
care.com, Instacart, POSTMATES,
Caviar, Zipcar, car2go, Getaround

Examples of types of platforms
included in study: Uber, Lyft,
TaskRabbit, eBay, Airbnb

Operators from 11 specific
platforms: Upwork, Work
Market, Fiverr, MBO Partners,
Visually, OnForce, Deliv, Wonolo,
HourlyNerd, Uber, FieldNation

Questionnaire asked workers
whether they engaged in
selling through an intermediary
(e.g., Uber or TaskRabbit); did
not include questions about
accommodation platforms

Examples of platforms included:
Lyft, Uber, TaskRabbit, Handy,
HourlyNerd, Airbnb, Etsy, eBay

Industry Study

Aspen Institute/
Time/BursonMarsteller

JP Morgan Chase
Institute

Emergent Research

Krueger & Katz

NASE/Kogod Tax
Policy Center

Emailed survey to 40,000 NASE
Members; 518 Respondents

Online survey of 6,028
individuals; 3,844 respondents

Survey of 4,622 On-Demand
Economy Operators of specific
platforms

Random sample of 1 million
Chase customers with a
checking account in every
month during the Study Period,
260,000 individuals received
income at least once from one
of 30 distinct platforms

Online interview of
3,000 American adults

Survey Method

Table 1

Mar. 10, 2016 –
April 1, 2016

Oct. 19, 2015 –
Nov. 4, 2015

Sept. 11, 2015 –
Oct. 1, 2015

Oct. 2012 to
Sept. 2015

Nov. 16-25, 2015

Study Period

22% of Respondents (112 NASE
survey respondents) offered
services or sold goods though an
On-Demand Platform in 2015

0.5% of all workers identify
customers through an online
intermediary

3.2 million per year; estimated to
increase to more than 7 million by
2020

2.5 million every month and 10.3
million (4.2% of adults) in the last
3 years; the total increased 47-fold
over 3 years

45 million people (22% of American
adults) have offered some good
or service at some point in the ondemand economy

Estimated Number of OnDemand Platform Operators

 A. Under the Radar: Small Businesses
Operating in the On-Demand Platform
Economy
Notwithstanding the on-demand platform economy’s
unprecedented growth and adoption by more than 86.5
million U.S. adults in just a few short years—Airbnb
was founded in 2008,21 the economic activity and
growth of these small business owners has largely gone
unacknowledged by most government measures for
tracking small business activity.22 At the same time, the
problem isn’t limited to government; tax practitioners
report that “while many do not know it, renting a home
short-term is basically running a small business and
this requires tax compliance.”23 And make no mistake,
the individuals who are earning income from powering
the on-demand platform economy are carrying on a
trade or business as small business owners for U.S. tax
purposes.24
Even so, most federal government agencies that
measure small businesses concede just how challenging
it is to define “small business” as a distinguishable
category of taxpayers and readily acknowledge “a
consensus does not exist on a definition of small
businesses, including which specific attributes or
thresholds distinguish small businesses from other
firms.”25 For example, the IRS Small Business and SelfEmployed division is responsible for administering
returns for individuals with business income and
businesses with less than $10 million of income, which
is one official threshold for defining small business.
Alternatively, the U.S. Small Business Administration
generally considers a small business to be an
independent business with fewer than 500 employees,
although even that definition can vary by industry.26
Not unlike the numerous criteria used to measure
the on-demand platform economy, how broadly (or
narrowly) the term “small business” is defined can
dictate results in terms of the data captured by a given
government metric. For example, using taxpayer data,
Treasury has developed a methodology to identify more
than 23 million small businesses, however, SBA’s Office
of Advocacy, relying on Census data, has identified more
than 28.2 million small businesses. 27
Making matters more complicated is the fact that some
relevant government measures for the smallest of small
businesses that would otherwise capture the business
activities and income earned by on-demand platform
participants use terms other than small business (e.g.,

7

nonemployers, self-employed, microbusinesses) in
developing data used to measure small business
activities.28 These inconsistencies exist throughout the
official government research as well as the U.S. tax code
itself29 and are a major reason why small businesses
operating in the on-demand economy have yet to be
reflected in government research on small business and
economic trends. But it’s not just inconsistent terms; it’s
inconsistent metrics that matter too.
For example, in a 2015 report to Congress on small
business tax compliance issues, GAO concluded that
most small businesses are individuals who report
some individual business income as a sole proprietor
(Schedule C) or as a landlord on a separate schedule
(Schedule E).30 This group of approximately 16 million
small business taxpayers (69% of all small businesses),
on average, earns $100,000 (or less) per year and
generates $1.4 trillion of the total small business income
reported to the IRS.31 However, it is very likely that
GAO’s analysis, which incorporated a 2011 Treasury
methodology to identify small businesses, does not
and would never include income from the majority of
taxpayers earning income from operating in the ondemand platform economy. The reason is simple: even
though there are more than 2.5 million individuals
actively earning business income as small businesses
owners working in the on-demand platform economy
every month, they generally don’t earn enough income
under Treasury’s methodology defining small businesses
to be included in their ranks.32
Specifically, the most comprehensive research on
the income of on-demand platform economy active
participants finds that monthly income averages range
from $533 to $314, which translates to $6,635 and
$3,768 annually. At those income levels, there’s little
chance that the average on-demand platform small
business operator would meet Treasury’s income
thresholds (generally, more than $10,000 in business
income or $5,000 in total business deductions) to be
included in its small business measures.33 In fact, these
income thresholds would fail to capture the typical
Airbnb host, who reports earning on average $7,530 of
annual income.

Our own survey found that 74% of respondents
earned $5,000 or less in 2015 from on-demand
platform work.

 B. The On-Demand Platform Economy  
  And Its Players Will Continue to Grow
Although the government research on measuring and
defining the on-demand platform economy is evolving,
industry experts who have been tracking the on-demand
economy’s growth have estimated that it will continue
its trend of double-digit growth through 2025.34 In fact,
the number of individuals operating as small businesses
in the on-demand platform economy is set to double
to seven million Americans by 2020, if not more.35
Although Census has yet to publish data reflecting
this accelerated growth, it has found that there is a
steady rise in “nonemployer businesses,” which would
be consistent with industry studies on the on-demand
economy.36
“Even at the low end, both in terms of participation
and dollars earned, [on-demand] platforms grew by
about 50% per year, making it by far the fastest growing
segment of the labor market.”37 This finding was recently
corroborated by study of the rise of alternative worker
arrangements from 1995 through 2015 that concluded
that though the on-demand economy was “relatively
small compared to other forms of alternative work
arrangements…it is growing very rapidly.”38
Indeed, as some financial industry analysts have
observed, “the vast majority of U.S. entrepreneurial
activity is small—nano small, [a]nd the ranks of selfemployed ‘solopreneurs’ are growing fast, with 53
million Americans freelancing today, and upwards of 66
million Americans, or 40% of the workforce by 2020.”39
To be fair, not all of the millions of Americans who are
projected to be freelancing by 2020 would necessarily
be small businesses in the on-demand economy, but a
good percentage of them will be.40

Our own survey of self-employed business owners
found that approximately 22% of respondents (or
a member of their household) had earned income
in 2015 from operating in the on-demand platform
economy from either providing services or selling
goods.

8

 PART II

Compliance Challenges of On-Demand
Platform Operators: It’s All about Timing
& Communication
Overwhelming complexity and inefficiency are hallmarks
of the current tax code and the Congressional record
is replete with examples of how unduly burdensome
the current system is across taxpayers’ experience.41
And we know from talking to some on-demand
platform operators and surveying others that their
tax compliance challenges are compounded by an
antiquated tax administration system. At the same time,
many on-demand platform operators are first-time,
small business owners and have little experience with
the requirements of quarterly-estimated payments or
self-employment taxes.42 This point is reflected in the
findings of the first study of tax issues of ridesharing
drivers conducted through tracking online forums where
the authors determined that “many posters were new
to filing taxes as independent contractors…[and] issues
surrounding Schedule C filing and expense taking and
documentation were often matters of first impression.”43
Although I just started driving last October, I
am very confused on how to file. This is my first
year filing my taxes separate from my parents.”
Email from Ride-Sharing Driver to Tax Preparer,
2016

A. They Got 1099 Problems and
Withholding Ain’t One….44
The U.S. tax system is basically a “pay-as-you-earnsystem” of tax collection. For employees, a portion
of income earned throughout the calendar year is
deducted (i.e., withheld) from wages by employers and
remitted to the IRS in pre-payment of employees’ tax
liability. However, small businesses operating in the ondemand platform economy are not subject to employer
withholding and are, instead, responsible for making
tax payments to the IRS for both federal income and
self-employment taxes (i.e., Social Security and Medicare
taxes).45 As a result, small businesses operators in the

9

on-demand platform economy often have different pain
points than their employee counterparts with respect to
their tax filings. For example, small businesses actively
participating in the on-demand platform economy
don’t receive IRS Form W-2 (wage and tax statements)
that they can use to fill out their tax returns. Instead,
on-demand platform economy operators are subject
to an entirely different set of rules and forms (e.g., the
IRS Forms 1099; Self-Employment Tax Form, QuarterlyEstimated Payments) that have very different taxpayer
filing requirements and with respect to self-employment
taxes, different tax rates.46
Under current tax law, payments for more than $600 for
services provided by nonemployees (e.g., independent
contractors, freelancers, small business owners) are
generally reported to the IRS on a Form 1099-MISC by a
payor, and a copy is provided to the service provider.47
However, if payments are made via credit card or debit
card, and the aggregate number of transactions to
one service provider exceeds 200 and the payments
exceed $20,000, then the payor (or, in this case, platform
processing customers’ credit card payments) is required
file a Form 1099-K to report the income to the IRS and
send a copy to the payee.48 Confusing, right? It gets
worse.
Some on-demand platforms only send a Form
1099-K to the IRS and small business operator if
the service provider or seller satisfies both the 200
transaction/$20,000 income thresholds.49 This strategy
is consistent with the IRS instructions on when sending
Form 1099-Ks is appropriate as opposed to a Form
1099-MISC.50 Other platforms send all of their small
business operators a Form 1099-K, regardless of
whether the small business owner meets the 200
transaction/$20,000 income threshold.51 And in certain
circumstances, a platform company will send both.52
This inconsistent reporting rule adoption among ondemand platform companies creates confusion among
taxpayers about whether they can expect to receive a

 Form 1099 at all. In fact, our survey found that only 32%
of respondents who had earned income working with
an on-demand platform economy in 2015 received a
Form 1099-MISC or Form 1099-K from their on-demand
platform company.53
In addition, we are aware, from talking to tax preparers
who specialize in advising individuals who earn income
from the on-demand platform economy, that when
taxpayers do not receive any Form 1099, they are
immediately confused as to whether they have to report
that income on their returns. Regardless of whether a
taxpayer receives a Form 1099, they are still responsible
for reporting income earned in connection with platform
work and taxes on that income. Failure to receive a 1099
does not exempt a taxpayer from reporting the income
on their tax return.54

Q3

Have you received a Form 1099-K or Form 1099-MISC from
the sharing economy platform or app you worked with in
2015?

Yes

No

I don’t know

10%

20%

30%

40%

50%

Answered: 62

60%

70%

80%

90%

100%

Skipped: 459

Answer Choices

Responses

Yes

20 (32.26%)

No

38 (61.29%)

I don’t know

4 (6.45%)

B. The Big Short(change) Story
Compounding the confusion of what forms a small
business can expect to receive from its on-demand
platform company (if any) is the overall challenge of
calculating actual taxable income and how much is
owed as well as figuring out when taxes should be
paid. Timing is everything—particularly when it comes
to taxes. For small business owners who owe at least
$1,000 in taxes, bad timing can result in penalties.
1. Timing: Quarterly-Estimated Tax Payments
Yep, I’ve been driving for two years while I’ve
been going to school full-time getting my
masters in transportation. Last year I grossed,
let me think, maybe $60,000? But I just gave
my forms to my dad’s neighbor who does taxes
on the side…What’s a quarterly-estimated
payment?”
Conversation with Ride-Sharing Driver, 2015
Under current tax rules, when small business owners
are expected to owe at least $1,000 in taxes and aren’t
subject to withholding, advance payments of estimated
tax are due to the IRS throughout the year.55 These
payments are due quarterly on April 15, June 15,
Sept. 15 and Jan. 15 and are referred to as quarterlyestimated payments.56 However, “[p]utting aside outright
tax cheats, young workers are financially inexperienced
and, increasingly, part of a gig economy—driving for
Uber, funding their creative work through Patreon—
typically don’t have their taxes withheld automatically
and need to set up a program of quarterly-estimated tax
payments on their own.”57 Remember, it’s a “pay-as-youearn” tax system.
In calculating whether a taxpayer needs to make
quarterly-estimated payments throughout the year,
taxpayers need to include both income taxes and
self-employment taxes owed—minus any refundable
credits—on income earned from on-demand platform
work. Added together, income tax and self-employment
tax can quickly reach the $1,000 threshold triggering
quarterly-estimated payments.
Consider if a ride-sharing driver netted $7,500 driving
for a platform company part-time in 2015. That amount
alone could translate to $1,060 just in self-employment
tax due ($859 Social Security tax and $201 Medicare
tax), which, in turn, would trigger quarterly-estimated
payment requirements—without even calculating

10

 any income tax owed. It just doesn’t take that much
income to trip over these filing requirements. What’s
more troubling is that a good percentage of even selfidentified self-employed taxpayers are unaware of
quarterly-estimated payment filing requirements. Our
survey revealed that among respondents who had
earned income working with an on-demand platform
company in 2015, 34% did not know whether they were
required to file quarterly-estimated payments with the
IRS on that income.

Q4

Do you know whether or not you are required to file
quarterly-estimated payments with the IRS?

Yes

No
10%

20%

30%

40%

50%

Answered: 65

60%

70%

80%

90%

100%

Skipped: 456

Answer Choices

Responses

Yes

43 (66.15%)

No

22 (33.85%)

For those who are supposed to make quarterlyestimated payments and don’t, penalties apply—even
when a taxpayer files a return before the April 15 filing
deadline.58 In fact, penalties may be imposed on any
underpayment for the number of days it remained
unpaid, or if a taxpayer doesn’t pay enough estimated
tax or if the payments weren’t made on time. This would
be a particularly unwelcome surprise for any taxpayers
who were required to pay quarterly-estimated payments
in 2015 and failed to do so. It’s not so hard to imagine a
taxpayer, who earned $7,500 in 2015 in the on-demand
platform economy, and then, when she went to file her
taxes on April 18, 2016, found out that not only did she
fail to make quarterly-estimated payments for all of
2015, but that she had also owed for the first quarter of
2016.59
We followed up with one IRS Chief Counsel Office
attorney operating in a field office about the incidence
of failure to pay quarterly-estimated payments and were
told, “I see it all the time. People get themselves into a
hole and just can’t get out of it when they fail to file their
quarterly-estimated payments and then go to file their
taxes. They owe way more than they can afford. They
just walk away and don’t file.” 60

11

2. Communication: Self-Employment Tax   
 Implications
Understanding the timing rules for when taxes must be
paid on on-demand platform income is one thing, but
actually calculating tax liability and including the 15.3%
self-employment tax (i.e., 12.4% for Social Security and
2.9% for Medicare), can also be an unwelcome surprise
for first-time small business filers. Like all other selfemployed small businesses, on-demand platform small
business operators are subject to self-employment tax
and are required to file once they earn more than $400
in net profit—even if this work is only a part-time gig.61
To encourage compliance, the tax law requires
individuals with business income who want to claim
business expenses to pay self-employment taxes.62
A key challenge for these small business owners
calculating their self-employment tax is that they are
actually required to pay more in Social Security and
Medicare taxes on this income than their employee
counterparts because employees split Social Security
and Medicare taxes with their employers, who
automatically deduct and send amounts owed to the
IRS.63 No such luck for small business operators in
the on-demand platform economy, who are on the
hook for the entire amount—although half of the selfemployment tax is deductible.
As noted earlier, self-employment taxes can add up
quickly and trigger quarterly-estimated payment
obligations; even where business income is only a
portion of a taxpayer’s overall income, which is the case
for the average on-demand economy small business
operator.64 At the same time, we learned from talking
to on-demand platform economy small business
owners and some tax preparers that while taxpayers
generally understood they would owe income tax on any
income earned, many were surprised to learn that selfemployment taxes were due too. These insights were
echoed in our survey responses indicating that among
respondents who earned on-demand platform economy
income in 2015, 43% were unaware as to how much
they would owe in taxes and did not set aside money for
taxes on that income.65

 Q5

Did you set aside money or are you aware of how much
you owe in taxes on the income you earned from working
through a sharing economy platform or app during 2015?

Yes

No
10%

20%

30%

40%

50%

Answered: 63

60%

70%

80%

90%

100%

Skipped: 458

Answer Choices

Responses

Yes

36 (57.14%)

No

27 (42.86%)

3. Communication: Expensing & Record Keeping
While actually forking over hard-earned income is likely
the biggest complaint most taxpayers have, calculating
how much is actually owed is a common compliance
burden for small business operators in the on-demand
economy. Moreover, identifying deductible business
expenses and record-keeping are absolute musts in
in order to properly determine how much a taxpayer
actually owes.
One of the most common business expenses that ondemand platform operators grapple with is how to
calculate business expenses, such as miles driven or
parking fees incurred. This tax compliance pain point is
particularly acute for ridesharing drivers who use their
personal cars to drive for on-demand platforms, but
it also presents challenges for other types of platform
work (i.e., running errands, purchasing supplies for
customers). The tax code allows taxpayers to choose
between taking a standard mileage deduction or
deducting actual expenses incurred.66 Research specific
to the tax challenges of ridesharing drivers has identified
mileage recordkeeping for business expensing as a
frequent source of both confusion and frustration for
drivers.67
For small businesses earning income using on-demand
platforms other than ridesharing, a range of potential
deductions and record-keeping requirements apply.
In the accommodation platform context, if taxpayers
want to take advantage of a tax provision that allows
individuals to rent all or part of their home for up to
14 days tax free, deductions aren’t allowed.68 However,
for those small business owners who do rent their
properties out for longer (e.g., the typical Airbnb host

who rents their single property out for 66 days every
year), deductible expenses include advertising, cleaning
and maintenance, property insurance and taxes, service
fees charged by the platform, and repairs.69
For online sellers using platforms, expensing questions
become complicated, depending on where they work.
In some cases, folks working out of their homes may be
entitled to a home office deduction, but claiming that
deduction has its challenges, and if taxpayers elect to
take a simplified method of determining the deduction,
they could very well be leaving money on the table.70
We found through our survey of self-employed business
owners who earned money in 2015 working with an
on-demand platform that 36% of respondents didn’t
understand what kind of records they needed to keep
for tax purposes and 47% didn’t know about any tax
deductions, expenses or credits that could be claimed
related to their on-demand platform income.71

Q6

Did you understand what kind of records you needed to
keep for tax purposes for your business income and
expenses generated from working with a sharing
economy platform?

Yes

No
10%

20%

30%

40%

50%

Answered: 66

60%

70%

80%

90%

100%

Skipped: 455

Answer Choices

Responses

Yes

42 (63.64%)

No

24 (36.36%)

Q7

Do you know about any tax deductions, expenses or
credits you could claim related to the income you earned
working through a sharing economy platform or app?

Yes

No
10%

20%

30%

40%

50%

Answered: 64

60%

70%

80%

90%

100%

Skipped: 457

Answer Choices

Responses

Yes

34 (53.13%)

No

30 (46.88%)

12

 In general, this finding is not that surprising as the tax
code doesn’t necessarily include all that many provisions
specific to individuals with business income.
When tax code provisions provide preferential
treatment to small businesses, the provisions
usually target expenses such as equipment
investment (e.g., Section 179 expensing), cost
of goods sold, (e.g., exceptions to inventory
accounting), and start-up costs. Preferential
[tax] treatment is not targeted towards
individuals who provide only labor services.
Those individuals generally do not benefit form
provisions targeted to small businesses in the
tax code.”72
Some platform operators inevitably pay the price for
their inexperience in filing as small business owners
the first time they file, but then develop a system of
recordkeeping and familiarity with the process that
keeps them out of trouble.73 Others aren’t so lucky.
To be sure, the private sector has developed any
number of products and apps targeted to relieving
these expensing and recordkeeping burdens, and in
speaking to tax preparers and industry experts, we know
that there is an exponentially growing market for these
products.

4. Timing: Cost of Compliance
In 2014 testimony before the U.S. House of
Representatives Small Business Committee, tax experts
explained how tax compliance places a significant
burden on small businesses, both in the aggregate and
relative to large businesses, and cited IRS estimates that
“businesses with less than $1 million in revenue bear
almost two-thirds of those costs.”74 With respect to the
on-demand platform economy, at least one tax expert
has observed, “[p]robably most of those providing
services through the new service companies have no
experience with the tax obligations of businesses…to
comply with tax laws, these microentrepreneurs will be
spending relatively large amounts on return preparation
assistance and devoting large hours to record keeping…
the sharing economy will be bearing significantly larger
than average tax compliance costs.”75
Costs can be quantified in terms of time spent preparing
returns and chasing down answers to complex tax
questions from the IRS. In her annual report to
Congress, the National Taxpayer Advocate noted that
during the 2015 tax filing season, only 37% of taxpayer
calls routed to customer service representatives overall,
and the hold time for taxpayers who got through
averaged 23 minutes.76 We heard time and again from
both taxpayers and tax preparers that small businesses
operating in the on-demand economy “generally want
to be honest and pay what they owe, but the tools and
resources don’t exist.”77
Indeed, 69% of our survey respondents who earned
income operating in the on-demand platform economy
indicated that they did not receive any tax guidance or
advice from the on-demand platform company with
which they contracted.
Evidence from our research and survey responses
suggests that this lack of information and guidance
results in undue burden on a significant portion of the
2.5 million on-demand platform economy operators in
terms of compliance costs. Almost half of all our survey
respondents indicated that they spent between 10 to 35
hours or more preparing their taxes for 2015.

13

 Q8

Did you receive any tax guidance or advice from the
sharing economy platform or app you worked with?

Yes

No

Other: Explain (e.g., I looked at chatrooms, online forums, IRS.gov)

10%

20%

30%

40%

50%

Answered: 61

60%

70%

80%

90%

100%

Skipped: 460

Answer Choices

Responses

Yes

12 (19.67%)

No

42 (68.85%)

Other: Explain
(e.g., I looked at chatrooms, online forums, IRS.gov)

7 (11.48%)

Q9

How much time did you spend last year doing your
taxes and/or preparing for your tax filing?

0-10 hours

10-20 hours

20-35 hours

35 or more hours

Don’t know
10%

20%

30%

40%

50%

Answered: 493

60%

70%

80%

90%

100%

Skipped: 28

Answer Choices

Responses

0-10 Hours

237 (48.07%)

10-20 Hours

139 (28.19%)

20- 35 Hours

63 (12.78%)

35 or more hours

37 (7.51%)

Don’t know

17 (3.45%)

14

 PART III

Treasury is Probably Getting
Shortchanged Too
Not only do inefficiencies of the current tax code
and administration system result in unnecessary tax
compliance challenges for small business operators
in the on-demand platform economy, they directly
translate to IRS’ ability to fairly administer the tax
system and Treasury’s bottom line. In terms of budget
consequences, the most recent data available from the
IRS estimates that more than 42% ($194 billion) of the
tax gap, or the amount of tax liability in a given year
that is not paid voluntarily and in a timely manner, is
attributable to the misreporting of individual business
income and related self-employment taxes from
Schedule C filers that underreport receipts (e.g., failing
to report cash transactions) or over-report expenses,
which aren’t subject to information reporting.78
Overall, compliance is highest where there is thirdparty reporting and/or withholding.79 According to IRS
statistics, in cases where employers do withholding,
only 1% of wage and salary income is misreported;
but in cases where there was no withholding or
information reporting, the IRS has documented a 63%
net misreporting rate.80
One reason small businesses are often considered
major contributors to the tax gap is because they often
deal in cash.81 Not so with the on-demand platform
economy operators—they deal exclusively in credit card,
debit card or mobile payment transactions. Although
some evidence suggests that Form 1099-K filings, which
are used for reporting some credit and payment card
transactions do trigger increases in small business’
compliance in reporting gross receipts, the same study
found that this increase of receipts was “largely offset”
by increased reported expenses, which are not readily
verifiable because they are not subject to information
reporting.82
Even though sending Form 1099s to the IRS and
taxpayers to report income is “widely acknowledged
to increase voluntary tax compliance in part because
taxpayers know that IRS is aware of their income,” 83
in order for this third-party reporting to be effective,
both the IRS and taxpayers have to actually receive a Form
1099.84 However, this outcome is not by any means
15

guaranteed by the current information reporting regime.
As noted earlier, the current instructions to the Form
1099-MISC clearly state that “[p]ayments made with a
credit card or payment card and certain other types of
payments, including third party network transactions,
must be reported on Form 1099-K…and are not subject
to reporting on Form 1099-MISC.”85 At the same time,
the Form 1099-K has its own 200 transaction/$20,000
income threshold for payments made by credit card.86

As a result, the existing information reporting regime
effectively creates a $19,399 tax reporting loophole,
which is the difference between $20,000 and $601—
the income thresholds for Forms 1099-K and 1099MISC.87

For example, under the current tax rules, a platform
company isn’t required to send a Form 1099-K or a Form
1099-MISC to the IRS for a small business operator who
makes $18,000 through 189 different transactions—
all of which are payment card transactions and are
described as de minimis payments for purposes of Form
1099-K.88 Given what the research has documented
regarding the monthly income of average on-demand
platform economy operators, it’s likely that the existing
reporting rules are not operating to trigger Form
1099-Ks to be generated for a substantial number of
taxpayers.
Remember, the average monthly income of on-demand
platform small businesses ranges from $533 to $314
(roughly $6,396 to $3,700 annually), which means that
the Form 1099-K $20,000 income reporting threshold
isn’t being tripped by a significant portion of on-demand
platform operators.89 This income would otherwise be
reported on a Form 1099-MISC, but for the fact that
the payments were made via credit card and subject
to the Form 1099-K 200 transaction/$20,000 reporting
threshold. This likely explains why 61% of our survey
respondents who earned income in 2015 from working
with an on-demand platform company indicated that
they did not receive any Form 1099.

 As a consequence of these rules, there is an increased
likelihood that taxpayers will be unaware of the full
extent of their tax compliance obligations. And less
inclined to pay them. We have already started to
document, at least anecdotally, the significance of this
reporting hole.
I got tons of questions this year from
[prospective clients] asking, ‘should I report my
income?’ - I always advise to do so, otherwise,
it would be tax evasion, but I would say more
often times than not, people ask if they had to
report their income if they aren’t receiving a
1099.”
Email from Small Business Tax Advisor, 2016 90
The IRS was informed of this tax reporting loophole
in 2014, and issued a statement that noted, “[w]e
are aware of a potential for 1099-MISC and 1099-K
double reporting, and are constantly monitoring our
case selection criteria to address this. We do expect to
provide more guidance, but we also do not expect this
issue to lead to an increase in examinations.” 91
It’s two years later, and the on-demand economy has
continued to grow to include more than 2.5 million
U.S. taxpayers and is projected to include more than 7
million by 2020.92 No guidance has been forthcoming,
however, IRS Commissioner Koskinen recently reiterated
the importance of third-party information reporting
in the context of the tax gap noting, “when there is
information reporting, such as 1099s, income is only
underreported about 7 percent of the time…but that
number jumps to 63% for income not subject to any
third-party reporting or withholding.”93

Notably, at least one on-demand platform is taking
steps in that general direction. In October 2015, Airbnb
announced plans to collect and remit state and local
hotel and occupancy taxes in several jurisdictions
including Washington state; Rhode Island; Washington,
D.C.; Portland, OR; San Francisco, San Diego, Palo Alto
and San Jose, CA; Philadelphia, PA; Phoenix, AZ and
Paris, France.96 In fact, Airbnb estimated that these
additional tax collection revenue efforts could generate
as much as $2 billion in potential revenue for America’s
cities.97
While a statutory or policy remedy may be premature
for addressing the tax compliance challenges of ondemand platform operators and their impact on the tax
administration system, Congressional investigation for
purposes of tax reform is certainly warranted given the
existing compliance challenges the current information
reporting regime presents for the on-demand platform
economy’s small businesses and the IRS’ ability to
efficiently administer the tax code.
In the meantime, the IRS can take proactive steps to
try and ease the tax compliance burden of on-demand
economy participants and facilitate their compliance.
Many small business owners we talked to had no
idea what quarterly-estimated payments were much
less when they were due and very few of the folks we
chatted with had any idea that they would be liable for
self-employment tax in addition to income taxes. Many
of the on-demand platform companies we spoke with
were very willing to do more to help their small business
operators, but were constrained from doing so over
concerns of raising misclassification challenges.

Tax gap issues, particularly when they involve small
businesses, are persistent and hard to resolve.
Congress has attempted in recent years to enact
legislation intended to curtail the tax gap using
increased information reporting, but the impact of
increased reporting requirements on small businesses
resulted in almost immediate repeal.94 Nevertheless,
the Obama Administration has also recognized the tax
gap as a pervasive issue and included, among other
proposals targeted to addressing misclassification, a
proposal to allow “independent contractors receiving
payments of $600 or more from a service recipient to
require the service recipient to withhold for Federal tax
purposes a flat rate percentage of their gross payments,
with the flat rate percentage being selected by the
contractor.”95

16

 Conclusion
Our assessment of the general confusion
state of play when it comes to filing taxes on
income earned from on-demand platform
work was consistently reinforced by interviews
with tax preparers, industry experts and the
existing literature. At a minimum, the IRS
should explore strategies in which it could
leverage third parties (e.g., on-demand
platform companies, tax software companies,
tax preparers), to address this inefficient state
of affairs. Everyone is losing under the current
rules. Both taxpayers and the IRS deserve
greater efficiency and less hassle. We can do
better.
To be sure, the on-demand platform
economy “adds an important element to
existing labor markets, where finding new
or additional work typically involves a lot of
effort and high transaction costs…landing a
platform job is often easier and quicker.” 98
And the on-demand platform economy is
going to continue to grow and provide these
opportunities.99
1.  More than 2.5 million U.S. taxpayers
are participating in the on-demand
platform economy as small business
owners every year, and millions more
are set to join their ranks in the next
decade.
2.  For tax purposes, on-demand economy
service providers and sellers are small
businesses owners, but their numbers
aren’t reflected in government data
designed to track small business
owners. In fact, these taxpayers don’t

17

necessarily realize they are small
business owners until tax time or they
receive an IRS notice.
3.  At best, these small business owners
are shortchanged when filing their
taxes; at worst, they fail to file
altogether. Approximately onethird of our on-demand platform
operator survey respondents didn’t
know whether they were required to
pay quarterly-estimated payments
and almost half were unaware of
any available deductions, expenses
or credits they could claim to offset
their tax liability. These taxpayers
face potential audit and penalty
exposure for failure to comply with
filing rules that are triggered by
relatively low amounts of earned
income. Compounding this problem is
inconsistent reporting rule adoption.
4.  The current tax administration
system isn’t working for a significant
percentage of on-demand platform
small business operators or Treasury
or IRS. More than 60% of our survey
respondents who worked for an ondemand platform company in 2015
reported that they did not receive a
Form 1099-K or Form 1099-MISC from
their on-demand platform, which likely
means the IRS didn’t either. The current
state of play is one of unnecessary
burden, potential audit and penalty
exposure for on-demand platform
economy players. We can do better.

 References
1

Computer and Internet Use Main, U.S. Census Bureau (Mar. 30, 2016), http://www.census.gov/hhes/computer/.

2

Alexandra Brown, Sam Dodini, Arturo Gonzalez, Ellen Merry & Logan Thomas, Consumers and Mobile Financial Services 2015, Board of Governors of the
Federal Reserve, 4 (Mar. 2015), http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201503.pdf.
See also, Aaron Smith & Diana Page, The Smartphone Difference, Pew Research Center (Apr. 1, 2015), http://www.pewinternet.org/files/2015/03/PI_
Smartphones_0401151.pdf.

3

Airbnb’s Growing Community of 60+ Women Hosts, Airbnb (Mar. 2016), https://www.airbnbaction.com/wp-content/uploads/2016/03/Airbnb_60_Plus_
Women_Report.pdf.
Gene Sperling, How Airbnb Combats Middle Class Income Stagnation, Airbnb (June 21, 2015), http://publicpolicy.airbnb.com/new-report-impact-airbnbmiddle-class-income-stagnation.

4

This is reflective of Uber’s incredible growth. As of December 2014, Uber counted 160,000 as driver partners, and during just the last three months of
2014, Uber drivers earned $657 million in revenue. Telephone Interview with Jonathan Hall, Head of Economic Research, Policy and Legal, Uber (Feb. 25,
2016).
See also, Jonathan Hall and Alan Krueger, Analysis of the Labor Market for Uber’s Driver-Partners in the United States, (Jan. 22, 2015), https://s3.amazonaws.
com/uber-static/comms/PDF/Uber_Driver-Partners_Hall_Kreuger_2015.pdf.

5

Diana Farrell & Fiona Greig, Paychecks, Paydays, and the On-demand Platform Economy: Big Data on Income Volatility, JP Morgan Chase Institute, 1-43 (2016)
(The “2016 JP Morgan Chase Report”), https://www.jpmorganchase.com/corporate/institute/document/jpmc-institute-volatility-2-report.pdf.

6

Id.

7

“The percentage of workers engaged in alternative work arrangements – defined as temporary help agency workers, on-call workers, contract workers
and independent contractors or freelancers – rose from 10.1% in February 2005 to 15.8% in late 2015.” Lawrence F. Katz & Alan B. Krueger, The Rise and
Nature of Alternative Work Arrangements in the United States, 1995-2015, (Mar. 29, 2016), http://scholar.harvard.edu/files/lkatz/files/katz_krueger_cws_
v3.pdf?m=1459369766.

8

A primary reason for why policymakers and the online platforms companies have been slow to tackle the simmering tax issues underlying this evolving
marketplace is the looming question of whether workers who provide services for customers via online platforms are really misclassified employees. If
so, then the tax and labor questions at the heart of the on-demand platform economy have very different and measurable consequences for taxpayers,
the on-demand platform companies and the IRS. Those issues are currently being litigated in courts in a number of jurisdictions across the country. See
generally, Tracey Lein, Meet the Attorney Suing Uber, Lyft, GrubHub and a Dozen California Tech Firms, Los Angeles Times (Jan. 24, 2016), http://www.latimes.
com/business/technology/la-fi-class-action-lawyer-20160124-story.html.
This report takes the position that because the research to date consistently shows that millions of taxpayers are participating in the on-demand
platform economy as small businesses, and millions more are set to join their ranks, for purposes of tax reform, review of the existing tax compliance
challenges these taxpayers face is warranted, notwithstanding the outcome of a specific misclassification case. See also, Johana Bhuiyan, Why the Uber
Drivers’ Lawyer Settled Their Fight to Become Employees, <re/code> (Apr. 30, 2016), http://recode.net/2016/04/30/uber-drivers-employees-contractorslawyer.
For more analysis of specific tax compliance challenges in the sharing sector, see, Shu-Yi Oei & Diane M. Ring, Can Sharing Be Taxed?, (Sept. 10, 2015),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2570584, which is the first detailed analysis of the tax compliance issues of sharing economy
taxpayers and provided the doctrinal foundation for subsequent empirical study.

9

2016 Kogod Survey of National Association of the Self-Employed Membership (April 2016) (unpublished raw survey data, National Association of the
Self-Employed).

10

Jonathan Godfrey, Courtney Bernard & Nick Miller, The State of the App Economy 4th Edition, ACT The App Association (Mar. 21, 2016), http://actonline.org/
wp-content/uploads/2016_State_of_App_Economy.pdf.

11

Katy Steinmetz, Exclusive: See How Big the Gig Economy Really Is, Time (Jan. 6, 2016), http://time.com/4169532/sharing-economy-poll/.

12

Seth D. Harris & Alan B. Krueger, A Proposal for Modernizing Labor Laws for Twenty-First-Century Work: The “Independent Worker,” 10th ed. Vol. 2015.
Hamilton Project, (2015).

13

We spoke with the primary author of this study who indicated that the results of the Emergent Survey were generally consistent with the results of the
2016 JP Morgan Chase Report. Steve King & Carolyn Ockels, Emergent Research Survey of On-Demand Economy (ODE) Survey (2016) (unpublished raw
data).

14

Farrell, supra at n. 5.

15

For a host of reasons the U.S. Treasury Department outlined in a letter to Sen. Mark Warner in October 2015, publicly available taxpayer filings “do
not provide a good measure of contingent workforce or independent contractor income, let alone the on-demand economy.” Letter from the U.S.
Department of the Treasury to Sen. Mark Warner (Oct. 27, 2015) TaxAnalysts Doc 2015-25376.

16

Farrell, supra at n. 5.

17

Sharing Economy: Staff briefing of U.S. House of Representatives Sharing Economy Caucus, 114th Congress (Feb. 4, 2016).

 18

Kogod Survey, supra at n. 9.

19

In addition, among those respondents who indicated that they had earned money in 2015 from the on-demand platform economy, 74% earned less
than $5,000. Id.

20

See King, supra at n. 13. See also, Farrell, supra at n. 5.

21

Catherine Sullivan Burson-Marsteller, Forty-Five Million Americans Say They Have Worked in the On-Demand Economy, While 86.5 Million Have Used It, Aspen
Institute, n. 11 (Jan. 6, 2016) http://www.aspeninstitute.org/news/2016/01/06/forty-five-million-americans-say-they-have-worked-demand-economywhile-865-million.

22

This is not altogether surprising given that while nonemployer small businesses constitute “nearly three-quarters of all businesses…they contribute
less than 4% of overall sales and receipts data…[and] due to their small economic impact, these firms are excluded from most other Census Bureau
statistics.” Nonemployer Statistics, Census Bureau (2016), https://www.census.gov/econ/nonemployer/index.html.

23

David McAfee, Airbnb, Hosts Face Compliance Issues, Practitioners Say, Bloomberg BNA Daily Tax Report (Oct. 22, 2015),
http://news.bna.com/dtln/DTLNWB/split_display.adp?fedfid=78043755&vname=dtrnot&wsn=512146000&searchid=27264877&doctypeid=
1&type=date&mode=doc&split=0&scm=DTLNWB&pg=0.

24

Carrying on a trade or business has been defined by the courts and IRS administrative guidance as the act of “engag[ing] in the selling of goods or
services,” as a “livelihood or in good faith to make a profit,” in a “regular, frequent and continuous” manner. (Deputy v. DuPont, 308 U.S. 488 (1940). Clear
profit motive of small businesses has been confirmed by industry surveys that have identified the desire to make more money as the primary reason
the majority of people work in the on-demand platform economy. See Emergent Research Survey, supra at n. 13. Further, in explaining what a trade or
business is for purposes of determining whether a taxpayer is self-employed, the IRS Self-Employed Individuals Tax Center explains that a taxpayer does
“not have to carry on regular full-time business activities to be self-employed…[h]aving a part-time business in addition to your regular job or business
also may be self-employment.” Business Activities, Internal Revenue Services (Apr. 16, 2016), https://www.irs.gov/Businesses/Small-Businesses-&-SelfEmployed/Business-Activities).

25

U.S. Gov’t Accountability Office, GAO-15-513, Small Businesses: IRS Considers Taxpayer Burden in Tax Administration, but Needs a Plan to Evaluate the Use of
Payment Card Information for Compliance Efforts (June 30, 2015), http://gao.gov/products/GAO-15-513.

26

Frequently Asked Questions about Small Business, Small Business Association Office of Advocacy (March 2014), https://www.sba.gov/sites/default/files/
advocacy/FAQ_March_2014_0.pdf.

27

Id. See also, GAO-15-513, supra at n. 25.

28

For example, “nonemployer business is “one that has no paid employees, has annual business receipts of $1,000 or more ($1 or more in the construction
industries), and is subject to federal income taxes.” Receipts include “gross receipts, sales, commissions, and income from trades and businesses, as
reported on annual business income tax returns.” Given the data available on the average monthly income of small businesses operating in the ondemand economy, it would appear that most of those small businesses would meet Census’ criteria of “nonemployer businesses.” Sarah A. Donovan,
David H. Bradley & Jon O. Shimabukuro, Cong. Research Serv. No. R44365, What Does the Gig Economy Mean for Workers? (Feb. 5, 2016), https://www.fas.
org/sgp/crs/misc/R44365.pdf.

29

U.S. Gov’t Accountability Office, GAO-14-652R, Tax Policy: Differences in Definitions and Rules in the Tax Code, (July 8, 2014), http://gao.gov/products/GAO14-652R. (Concluding that “the definition of small business can depend on number of employees, amount of gross receipts, and other characteristics.”).

30

See GAO-15-513, supra at n. 25.

31

Id.

32

Specifically, GAO began its analysis with identifying what groups of taxpayers were small businesses, using two distinct litmus tests developed by
Treasury in 2011 as a more “nuanced approach to identifying small businesses.” Each of these tests had specific income thresholds that a business
return would first have to meet. Under the De Minimis Test, total income or deductions would need to exceed $10,000 or their sum exceed $15,000,
and under the Business Activities Test, total deductions should exceed $5,000 in order for a return to be counted as a small businesses. Notably, in 2011,
when Treasury first developed these tests, it used them to measure taxpayers with some business income as reported on 2007 Schedule C returns—
well-before the advent of the on-demand platform economy— and found that 12.5 million Schedule C filers did not meet the De Minimis Test and 2.3
filers failed the Business Activities Test. Similarly, the two business tests eliminated 5.0 million Schedule E rental filers as small businesses. On average,
the Schedule C filers that failed these income thresholds reported $7,000 of total income and $4,600 of net income, whereas the excluded Schedule
E filers reported an average of $8,400 of total income and $800 of net income. In developing this approach, OTA focused on incorporating income
thresholds to ensure that misclassified employees and non-business income, or hobby income, were excluded in the methodology.
Office of Tax Analysis, OTA Technical Paper No. 4, Methodology to Identify Small Businesses and Their Owners (Aug. 8, 2011), https://www.treasury.gov/
resource-center/tax-policy/tax-analysis/Documents/OTA-TP-4.pdf.

33

We reiterate that these monthly income averages are just that, averages. There are likely numerous examples of Etsy sellers or TaskRabbit taskers or
Lyft drivers earning well in excess of these averages. However, current taxpayer filing data precludes a more precise understanding of income earned by
small businesses. Farrell, supra at n. 5. See Also, Treasury Letter to Warner, supra at n. 15.

34

Furthermore, one estimate suggested that sharing economy companies have the potential to increase global revenues from roughly $15 billion today to
around $335 billion by 2025. PwC, The Sharing Economy: Consumer Intelligence Series,(2015). https://www.pwc.com/us/en/technology/publications/assets/
pwc-consumer-intelligence-series-the-sharing-economy.pdf (2015).

35

Emergent Research Survey supra at n. 13. See also, Rob Wile, There Are Probably Way More People in the ‘Gig Economy’ Than We Realize, Fusion (July 27,
2015) http://fusion.net/story/173244/there-are-probably-way-more-people-in-the-gig-economy-than-we-realize/.

36

See CRS R44365 supra at n. 28.

 37

2016 JP Morgan Chase & Co. Institute, The Online Platform Economy: What is the Growth Trajectory? Insight blogpost (May 2, 2016), https://www.
jpmorganchase.com/corporate/institute/institute-insights.htm.

38

In contrast, some government measures of the smallest of small businesses do not reflect a similar growth. In particular, BLS data tends to indicate that in
the period from 2002 through 2015, self-employment gradually declined and subsequently flattened. That noted, the Katz & Krueger Report determined
that the proportion of workers in alternative contingent relationships (i.e., independent contractors, temps, on-call and on-demand economy workers)
showed an increase of 9.4 million from 2005 to 2015. However, these estimates only consider full-time positions and not part-time positions. Katz &
Krueger Report, supra at n. 7.

39

Arjan Schutte & Colleen Poynton. 1099 Problems And W2s Ain’t One: The 1099 Economy’s Problems, Advantages, and Outlook, CB Insights Blog. (Sept. 15,
2015) https://www.cbinsights.com/blog/1099-economy-opportunities-threats (citing, Intuit 2020 Report, Intuit (Oct. 2010) http://http-download.intuit.com/
http.intuit/CMO/intuit/futureofsmallbusiness/intuit_2020_report.pdf).

40

Anna Louie Sussman & Josh Zumbrun, Contract Workforce Outpaces Growth in Silicon-Valley Style ‘Gig’ Jobs, The Wall Street Journal (Mar. 25, 2016) http://
www.wsj.com/articles/contract-workforce-outpaces-growth-in-silicon-valley-style-gig-jobs-1458948608. See also, Katz & Krueger Report, supra at n. 7.

41

See U.S. Sen. Comm. on Finance, The Business Income Tax Bipartisan Tax Working Group Report (July 2015) http://www.finance.senate.gov/newsroom/
chairman/release/?id=e9eefc66-7e11-4276-939f-3eca6fd6d959.

42

“Many [small businesses] are self-employed for the first time and unaware of the need to keep careful records and make estimated tax payments four
times a year. They’ve never filed a Schedule C, or paid self-employment taxes.” Kathleen Pender, Here’s Why Uber and Lyft Send Drivers Such Confusing Tax
Forms, San Fransisco Gate (Feb. 20, 2015) http://www.sfgate.com/business/networth/article/Here-s-why-Uber-and-Lyft-send-drivers-such-6092403.php.

43

Shu-Yi Oei & Diane M. Ring, The Tax Lives of Uber Drivers: Evidence from Internet Discussion Forums. (Feb. 10, 2016), http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=2730893. See also, Oei, supra at n. 8.

44

Schutte, supra at n. 39.

45

Harris, supra at n. 12.

46

Robert W. Wood, Do You Want a 1099 or a W-2?, Forbes, (Nov. 21, 2013) http://www.forbes.com/sites/robertwood/2013/11/21/do-you-want-a-1099-or-aw-2/#3bd642c449f1.

47

IRC § 6041.

48

IRC § 6050W.

49

See generally, Lyft, https://help.lyft.com/hc/en-us/articles/213582038-Tax-Information (last visited Apr. 16, 2016); Airbnb, https://www.airbnb.com/help/
article/414/should-i-expect-to-receive-a-tax-form-from-airbnb (last visited Apr. 16, 2016); and Etsy, https://www.etsy.com/seller-handbook/article/taxes101-for-etsy-sellers/22721885775 (last visited Apr. 16, 2016).

50

2016 Instructions to Form 1099-MISC, Internal Revenue Service, https://www.irs.gov/pub/irs-pdf/i1099msc.pdf.

51

How to Access my 1099, Uber, https://help.uber.com/h/9666752c-b088-4090-8e58-ba923938253a (last visited Apr. 16, 2016).

52

Both Uber and Lyft include language on their websites explaining circumstances when their drivers may expect to receive both types of Forms 1099.

53

Kogod, supra at n. 9.

54

Mark P.Keightly, Cong. Research Service, R41400, Economic Analysis of the Enhanced Form 1099 Information Reporting Requirements (2011) http://
www.ncsl.org/documents/health/Analysis1099_12111.pdf.

55

There is an exception to this requirement where a taxpayer had no tax liability and was a U.S. citizen or resident for the prior 12-month period.

56

Form 1040 Estimated Tax for Individuals, Internal Revenue Service (Apr. 16, 2016), https://www.irs.gov/uac/Form-1040-ES,-Estimated-Tax-for-Individuals-1.

57

Polly Mosendz, Young, Broke, and Scared of the IRS: The Millenial Tax Trap, BloombergBusiness, (Mar. 24, 2016), http://www.bloomberg.com/news/
articles/2016-03-24/young-broke-and-scared-of-the-irs-the-millennial-tax-trap.

58

Form 1040 Estimated Tax, supra at n. 56.

59

Id.

60

Interview with Chief Counsel Field Attorney, Internal Revenue Service, (Mar. 16, 2016). Notes and follow-up texts on file with author.

61

Self-Employed Individuals Tax Center, Internal Revenue Service (2016), https://www.irs.gov/Individuals/Self-Employed. See also, Oei, supra at n. 8.

62

Jennifer Spiesz & Charles Harter, Self-Employment or Other Income?, Journal of Accountancy (Jul. 2009), http://www.journalofaccountancy.com/
issues/2009/jul/20091639.html#sthash.CRYfHqzh.dpuf.

63

Tara Siegel Bernard, Tax Tips for Those Who Make Money in the Gig Economy, The New York Times (Mar. 31, 2016), http://www.nytimes.com/2016/03/05/
your-money/tax-tips-for-those-who-make-money-in-the-gig-economy.html?_r=0.

64

King, supra at n. 13.

65

Kogod, supra at n. 9.

66

IRC §274(d). https://www.irs.gov/publications/p463/ch04.html.

 67

Oh, and commuting miles? Forget it—those generally aren’t deductible. Oei, supra at n. 43.

68

Laura Saunders, Airbnb Income May Be Tax-Free – But There’s a Catch, Wall Street Journal (Apr. 2, 2015) http://www.wsj.com/articles/popular-tax-breakcan-lead-to-filing-hassles-1427982638.

69

Airbnb: General Guidance on the Taxation of Rental Income, Airbnb (Mar. 31, 2016) http://assets.airbnb.com/eyguidance/us.pdf.

70

Bernard, supra at n. 63.

71

Kogod, supra at n. 9.

72

OTA Tech. Paper No. 4, supra n. 32.

73

Bernard, supra n. 63.

74

Donald J. Marron, Tax Issues Facing Small Business, Testimony before the House Small Business Committee, (Apr. 9, 2014), http://www.urban.org/sites/
default/files/alfresco/publication-pdfs/904621-Tax-Issues-Facing-Small-Business.PDF.

75

Martin A. Sullivan, 10 Tax Challenges for the Sharing Economy, Tax Notes (July 13, 2015), http://www.taxnotes.com/tax-notes/excise-taxes/economicanalysis-10-tax-challenges-sharing-economy/2015/07/13/14910186. See also, Oei, supra at n. 8.

76

National Taxpayer Advocate Service, Internal Revenue Service (Apr. 4, 2016) http://www.taxpayeradvocate.irs.gov/reports/fy-2016-objectives-report-tocongress/news-release.

77

Interview with Derek Davis, Founder, www.sharedeconomycpa.com (Apr. 13, 2015). Davis is the Founder of www.sharedeconomycpa.com, a company
he launched in 2014 to specialize in providing tax preparation services for individuals participating in the on-demand platform economy. Since its
founding, SharedEconomyCPA has grown 300%.

78

Tax Gap Estimates for Tax Years 2008-2010, Internal Revenue Service (April 2016)
https://www.irs.gov/PUP/newsroom/tax%20gap%20estimates%20for%202008%20through%202010.pdf.

79

Micheal Cohn, IRS Reports an Increase in the Tax Gap, Accounting Today (Apr. 28, 2016) http://www.accountingtoday.com/news/tax-practice/irs-reportsan-increase-in-the-tax-gap-77953-1.html.

80

Id.

81

Marron, supra n. 74.

82

Joel Slemrod, Brett Collins, Jeffrey Hoopes, Daniel Reck, & Michael Sebastiani, Does Credit-Card Reporting Improve Small Business Tax Compliance? (Oct. 2,
2015), http://ssrn.com/abstract=2515630 or http://dx.doi.org/10.2139/ssrn.2515630.

83

U.S. Gov’t Accountability Office, GAO-11-218T, Small Businesses: Tax Compliance Benefits and Opportunities to Mitigate Costs on Third Parties of Miscellaneous
Income Reporting Requirements (2010), http://www.gao.gov/new.items/d11218t.pdf.

84

Cohn, supra at n. 79.

85

2016 Instructions to Form 1099-MISC, supra at n. 50.

86

2016 Instructions to Form 1099-K, Internal Revenue Service (2016), https://www.irs.gov/pub/irs-pdf/i1099k.pdf.

87

Kelly Phillips Erb, Credit Cards, the IRS, Form 1099-K and the $19,399 Reporting Hole, Forbes Magazine (Mar. 28, 2016) http://www.forbes.com/sites/
kellyphillipserb/2014/08/29/credit-cards-the-irs-form-1099-k-and-the-19399-reporting-hole/#369f81916c37.

88

2016 Instructions to Form 1099-K, supra at n. 86.

89

Id. Uber being a notable exception—they send every one of their driver-partners a Form 1099-K, regardless of income earned.

90

Email with Derek Davis, Founder, www.sharedeconomycpa.com (Mar. 30, 2016).

91

Erb, supra at n. 87.

92

King, supra at n. 13.

93

Cohn, supra at n. 79.

94

Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, P.L. 112-9.

95

General Explanation of the Administration’s 2017 Fiscal Year Revenue Proposals, U.S. Department of Treasury (Feb. 2016), https://www.treasury.gov/
resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf.

96

McAfee, supra at n. 23.

97

Airbnb: Generating $2 Billion in Potential Tax Revenue for America’s Cities, Airbnb, (last accessed Mar. 30, 2016), https://www.airbnbaction.com/wp-content/
uploads/2016/01/USCM-Tax-Report.pdf.

98

Farrell, supra at n. 5.

99

See generally Katz & Krueger, supra at n. 7.

 About the Author
Prof. Caroline
Bruckner
Executive-in-Residence,
Accounting and Taxation
Managing Director,
Kogod Tax Policy Center,
Kogod School of Business,
American University

Prof. Bruckner is on the faculty of American University’s
Kogod School of Business and is the managing director
of the Kogod Tax Policy Center, which researches tax
issues specific to small businesses and entrepreneurs.
She previously worked for the U.S. Senate Committee on
Small Business and Entrepreneurship (SBC) from 2009
through 2014, ultimately as Chief Counsel, where she
worked on small business tax legislation and advised
the committee and its chair on tax, labor and budget
matters. As counsel for the SBC, she worked with U.S.
policy makers and small businesses stakeholders across
the political spectrum on small business tax legislation
and to develop the tax title to the Small Business
Jobs Act of 2010 (P.L. 111-240). Prior to public service,
Bruckner was a senior associate with the international
tax services group of PricewaterhouseCoopers, LLP Washington National Tax Services (PwC-WNTS), where
she advised clients on international tax issues. Before
joining PwC-WNTS, she served as an associate in the
employee benefits group of PaulHastings. Bruckner
has an LLM in tax law from Georgetown University Law
Center, a JD from George Mason University School of
Law, and a BA from Emory University.

Acknowledgments
We thank the Intuit Tax and Financial Center for
financially supporting Kogod Tax Policy Center’s research
and are grateful to David Williams and Krista Holub for
helpful comments on drafts of this report.
In addition, we appreciate the many contributions of
James R. White, former GAO Director of Tax Issues, to
the research and development of this report as well
as Jen Brown, Academic Fellow to the Kogod Tax Policy
Center, and Hope Black, Technical Contributor, for their
invaluable work on this project.

  

 

 

 

KOGOD SCHOOL of BUSINESS

AMERICAN UNIVERSITY - WASHINGTON, DC