Sharing economy - need for tax literacy

The House Small Business Committee held a hearing today (May 24) (part 1 of 2) on “The Sharing Economy: A Taxing Experience for New Entrepreneurs.” Part 2 is scheduled for May 26 with National Taxpayer Advocate Nina Olson speaking.  A focal point of the hearing per the posted testimony was difficulties freelancers face in the sharing economy because they don't fully understand their tax obligations.

The opening statement of committee chair Congressman Steve Chabot noted:

"these entrepreneurs are running smack-dab into the buzz-saw of an outmoded tax code that is not designed to accommodate them. The tax compliance challenges they face have gone largely unacknowledged so far. But as we are hearing from a growing chorus of entrepreneurs, they present new and unnecessary obstacles for our small businesses.

Some of these new entrepreneurs fail to file their taxes altogether, and, when they do, they often pay too much. They don’t know that can deduct certain expenses, or they don’t have the records to back up their deductions, putting them at risk for audit.

Unfortunately, the IRS has not been part of the solution for entrepreneurs in navigating this new sharing economy. Too often, it has been part of the problem.

Our current tax system isn’t working for these new small businesses. In many ways, it is working against them. We can do better, we must do better.

Today, we will explore some of these problems and discuss some potential solutions with this distinguished panel."

But, their challenges are mostly those that small businesses have had for years.  One of the signs that  you are a contractor/self-employed rather than an employee is that you look like you are a business. You keep records, you understand how to make a budget and generate a profit, grow your business, etc.

One simplification that freelancers have is that they don't have to deal with payroll taxes because they don't have employees. They do have to make quarterly estimated taxes for federal and state income taxes and self-employment taxes. They need to keep records of revenue and expenses and reconcile any 1099-MISC and 1099-K received.

So, why isn't the system working for freelancers?  I think the problem is that they entered business in non-traditional ways. That is, they didn't have to do a lot of research and may not have had to invest anything to get started. This is in contrast to starting a restaurant where one likely would take more time to gain some financial skills and knowledge.

Yes, the IRS should send them information once they know they are filing a Schedule C. The IRS can provide the basics of reporting revenue, tracking deductible expenses and reconciling 1099 forms.

A representative from TaskRabbit suggested offering some type of moratorium to allow taxpayers and the IRS to get simpler compliance tools available.

I have been suggesting for years that technology and economic changes would lead to more self-employed entrepreneurs.  I suggested a few times at my university that all students get some instruction, such as part of general education, on entrepreneurship including basic financial and tax literacy, how to start your own business (including that of a consultant or freelancer).  The sharing economy model shows the great likelihood that more individuals will be self-employed. That does bring more tax compliance considerations beyond what an employee faces. We need to provide instruction in high school and college to increase the financial and tax literacy of students. They will need it!

What do you think?