The Sharing Economy: Not Making it Easy for the Tax Man

July 14th 2015

The Tax Man is having a difficult time trying to keep up with the advances in technology and the businesses that take advantage of it. In a world where technology has enabled swift global and communal evolutions, taxation of these evolutions provides challenges.

One such evolution is the ‘Sharing Economy’, AKA ‘Collaborative Consumption’ or ‘Peer Economy’. The Sharing Economy is defined as the growing preference for individuals to rent/borrow/upcycle etc. rather than purchase new products or solicit the help or expertise of the community rather than a company. In other words, cut out big corporations and share among themselves. Companies such as Uber, a taxi-type service that uses anyone with a car (who have been vetted of course), AirBnB, a hotel-type rental service by individuals renting out their homes, and others, are using technology and creating income-making opportunities for individuals at the push of a button. These service providers are often hard to tax, as there is no information being provided to the IRS by third parties.

One of the current hot topics regarding workplace protection for those working in this industry was brought up by Hillary Clinton earlier this week. "This 'on demand,' or so-called gig economy, is creating exciting opportunities and unleashing innovation, but it's also raising hard questions about workplace protections and what a good job will look like in the future," she said.

Administrators want sharing companies to switch their workers from contractors to employees, however, many in the industry disagree. In June, California proposed to categorize Uber drivers as employees. If the proposal passes, Uber would be required to withhold income tax, pay unemployment taxes and more. Currently, Uber drivers, and many others working in the sharing economy, are classified as 1099s (independent contractors). For those who are unaware, the tax bill at the end of the year could come as a shock; for those in the know, the pain of doing taxes is the tradeoff they make willingly to work independently.

What all this uncertainty means for the government is simple - loss in revenue. The sharing economy is relatively new and the government has not yet developed an enforcement mechanism that is suitable.

Klueger & Stein, LLP provides tax planning and business structuring services to many innovative, tech-based companies. We will continue to advise our clients on developments as they pertain to their best interests.