Tax Day Highlights the Challenge of Documenting Income for Independent Workers
This post originally appeared on the Aspen Institute Future of Work Initiative blog.
Since 1955, today, April 15 has been the deadline to file taxes in the U.S., a day dreaded by many. This year, policymakers extended the federal tax filing deadline for individuals and businesses three months, to July 15, due to the COVID-19 pandemic. This extension offers a small but needed bit of financial breathing room for many. Amid unprecedented unemployment and uncertainty permeating so many aspects of life, filing taxes should be the least of people’s concerns right now.
Even with the deadline postponed, though, Tax Day serves as a reminder of how independent workers face additional challenges documenting their income and maintaining financial records–which can complicate their eligibility for COVID-19-related relief. Traditional employees typically receive a W-2 from their employers documenting their annual income, have taxes withheld throughout the year, and receive a refund upon filing. Independent workers, in contrast, have no employer withholding taxes and often no official documentation of income. Those with more than nominal tax liability are expected to predict their annual income, track and document their expenses, and make estimated payments quarterly–especially challenging given the high levels of income volatility experienced by many independent workers. This year, these long-standing obstacles mean that independent workers face additional challenges applying for and receiving COVID-related relief payments.
Pandemic Unemployment Assistance (PUA), created by the CARES Act, extends unemployment benefits to self-employed individuals, including gig platform workers classified as independent contractors. This program, modeled after Disaster Unemployment Assistance programs implemented after natural disasters, is the largest ever created to provide unemployment benefits to these workers. Given skyrocketing rates of unemployment and widespread shelter-in-place orders, these benefits will be essential to these workers, and represent an important first step in adapting the safety net to the changing nature of work.
Thus far, though, implementation has been a challenge for many of the same reasons filing taxes can be such a burden. Unemployment Insurance (UI) applications, developed and administered by states, have been designed for traditional employees. Many depend on consistent and documented earnings to establish eligibility and benefit amounts, for example, asking for several years of quarterly earnings information. As states struggle with the highest number of UI claims ever and outdated technological infrastructure, they are also scrambling to adapt systems to accommodate independent workers, leading to delays getting benefits paid out to recipients. Federal Department of Labor guidance lacked advice for documenting independent workers’ income, meaning states are on their own and likely to develop a patchwork of approaches. Some states have told self-employed workers to hold off on applying until they update their processes, meaning more than a month of no income for many as rent, groceries, and other expenses pile up.
Independent workers need a process for income documentation that is easy for workers to submit and simple for states to implement and process. In the near term, like much of the PUA framework, details can be borrowed from Disaster Unemployment Assistance programs, including grace periods for submitting documentation without holding up payments, and sworn statements in cases in which more formal documentation is unavailable. Given that many of the locations where people may seek assistance with taxes and benefit applications are closed during social distancing, including libraries and Volunteer Income Tax Assistance sites, states may need additional resources to develop and publicize remote web, phone, and mail-based aid.
In addition, states can mandate companies who hire many independent workers, including online platforms, to submit wage data to Unemployment Insurance offices with penalties for noncompliance, as New York has done. Should states determine workers to be employees and eligible for traditional UI, this equips them to distribute benefits expediently. Should the workers be eligible for PUA, it provides them with information that can be applied to benefit calculations, also promising to get payments into the hands of workers sooner. Information sharing with state Departments of Revenue may be able to provide UI offices with additional earnings information, which Rhode Island recently allowed.
Ensuring that independent workers receive reliable documentation of earnings can aid in any future assistance applications along with tax filing. Although most independent workers receive a Form 1099-MISC, required for any payment above $600, those working through third-party payment processors, including online platforms, are only owed income documentation on a Form 1099-K if they make at least $20,000 and complete over 200 or more transactions. In a 2018 issue brief, “Tax Simplification for Independent Workers,” the Future of Work Initiative called for lowering this threshold to ensure more workers receive clear documentation of their earnings. Several states, including Vermont, Massachusetts, Alabama, and Illinois, have done this, simplifying taxes for workers, improving compliance for governments, and providing documentation that could be used for unemployment benefit calculation.
As the COVID-19 crisis has made so painfully apparent, much of our safety net is in desperate need of reimagining. In such a challenging time, documenting income, whether to file taxes or apply for unemployment benefits, should not be an obstacle. Reviewing documentation procedures for for taxes and unemployment benefits and clarifying PUA benefit calculation are approachable steps in this reform that can level the playing field for businesses, improve compliance for governments, and provide benefits for workers across arrangements.