Congress considers new way to tax the sharing economy

The sharing economy has proved a conundrum for the Internal Revenue Service (IRS) for years. How can the federal agency efficiently tax a market that operates almost solely online; an economy that involves an exchange generally just between two people?

It appears the federal agency may have found an answer.

Congress is considering a new proposal that would allow for an expansion on the current system. Although the IRS does not require income taxes paid by the businesses that run the platforms for these services, it does require reporting of earnings to individuals that exceed $20,000. The new proposal would reduce this threshold to $1,000. The individuals that use the shared economy to make these earnings are then required to meet certain tax obligations with the IRS. A failure to do so can result in collection efforts.

Take a step back, how does the sharing economy work? Essentially, a company like Etsy or Airbnb provides an online platform. This platform is then used by individuals who offer qualifying services to customers that are willing to pay for the services or products.

Those offering services or products are labeled as independent contractors, not employees. This is an important distinction for tax purposes as employers must generally pay much more for tax obligations for employees. Also, contractors are generally responsible for their own tax obligations. This shifts the burden to appease the IRS from the platform, i.e. Airbnb, to the service provider. In the case of Airbnb, that would be the host.

Will the new proposal be successful? A recent piece in Accounting Today discussed the proposal, noting that the backing Representative Republican Senator John Thune believes the proposal is gaining momentum.

Even if this proposal does not pass, it is likely that changes to the tax structure used for the sharing economy will happen in the near future. As such, anyone that operates within this market is wise to seek legal counsel. An experienced attorney can review your tax dealings and make sure you are in compliance. If not, your lawyer can assist you with coming into compliance in a manner that best protects your business interests