Income-Tax Reporting In The Freelance Economy

By Kathleen Pender
San Francisco Chronicle.

Uber and Lyft say their drivers are independent contractors, not employees. But when it comes to income-tax reporting, they are treated as neither.

Traditional employers send employees, and the Internal Revenue Service, Form W-2, which shows their wages, deductions and other information.

Freelancers and independent contractors typically get Form 1099-MISC (for miscellaneous income) from any person or company that paid them more than $600 the past year.

But people who earn money through Uber, Lyft, Airbnb, Task Rabbit and a number of other companies in the sharing economy often get neither form. If they get anything, it’s usually Form 1099-K, a relatively new and confusing document used mainly to report credit and debit card payments and online transactions.

Peter Ashlock, who drives for UberX in San Francisco, was stunned to receive Form 1099-K showing he had received $68,997 in gross credit card payments last year. “That is about $11,000 more than the payments received in my checking account,” he said.

Ashlock also made about $8,400 in “gross ride earnings” driving for Lyft last year, but he got no 1099-K for those earnings.

The reason: Uber sends a 1099-K to any driver who makes at least one trip. Lyft sends them only to drivers who make at least 200 trips and generate at least $20,000 in fares per year.

When Ashlock went onto Lyft’s online help center to learn more about this policy, the first thing he saw was a quote attributed to Albert Einstein: “The hardest thing in the world to understand is the income tax.”

If Einstein couldn’t understand the tax system, it’s easy to see why entrepreneurs in the on-demand economy are befuddled. Many 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. Getting a 1099-K adds to the confusion.

The law that created Form 1099-K was passed in 2008, before most sharing-economy companies were started. Congress saw it as a way to unearth income that was not being reported to the IRS.

It requires banks and other entities that provide credit and debit card acceptance services to send this form to merchants with whom they do business. The form, which also goes to the IRS, shows the gross revenue a merchant received on payment cards the previous calendar year. There is no exception for small amounts; even $1 must be reported.

Payment networks
The reporting requirement also applies to third-party payment networks such as PayPal, StubHub or, although they are required to send the 1099-K only to merchants that conducted more than 200 transactions totaling more than $20,000 in the calendar year.

The first 1099-Ks went out in early 2012 for tax year 2011 and immediately caused confusion.

One problem: The number labeled “Gross amount of payment card/third party network transactions” often exceeds payments the merchant actually received. For retailers, it might include shipping fees and items that were returned.

In Ashlock’s case, the $68,997 in gross transactions reported on his 1099-K included $10,324 in fees paid to Uber, $806 in bridge tolls paid by passengers, $31 in fees charged to customers who split the fare, and $3,381 in safe-ride fees (which Uber uses to vet drivers).

Little IRS help
Another problem: The IRS was expected to put a line on the tax form for this number, but never did. No IRS forms, instructions or publications explain where to put this income, says Jerri Langer, an attorney with Cokala Tax Information Reporting Solutions.

That doesn’t mean taxpayers can ignore it. Sole proprietors should usually include it with gross receipts and sales on Schedule C, Line 1. If they also received payments by cash or check (which are not included on Form 1099-K) or income reported on Form 1099-MISC, that too goes on Line 1. Even if they didn’t get a 1099, taxpayers are required to report all income to the IRS, unless there is a specific exemption for it.

Payments reported on 1099-K that they never received — such as tolls paid by passengers or fees paid to their online platform — can be deducted on Schedule C, along with other business-related expenses.

(Exception: People who make money through Airbnb should generally report this income on Schedule E, which is used for rental real estate, not on Schedule C. They might not have to report the income at all if they rented their home for 14 or fewer days last year.)

Normally, companies that pay an independent contractor at least $600 in one year generally send them a 1099-MISC, said Mark Luscombe, principal analyst with Wolters Kluwer Tax & Accounting, is not sure why these companies are sending out 1099-Ks.

And that’s what Uber did until last year. But in 2014, it sent a 1099-K to any driver who completed at least one trip. It made the switch because “the 1099-K has emerged as the standard form for independent contractors that utilize technology platforms like ours,” Uber spokeswoman Sarah Maxwell said in an e-mail.

Lyft is different
Lyft also sends 1099-Ks to drivers, but only those “who give at least 200 rides and generate at least $20,000 in ride receipts in a year,” Lyft spokeswoman Chelsea Wilson said in an e-mail. “Drivers who earn at least $600 from bonuses, mentor training and reimbursements get Form 1099-MISC. Drivers who meet neither criteria get no tax form.”

Wilson explained that the 1099-K is used “when we’re acting as a payment processor, from passenger to driver.” The MISC is used “when we pay drivers, as independent contractors, for services to Lyft.”

If this seems confusing, it’s because the rules surrounding Form 1099-K are still evolving, as is the nature of the on-demand workforce.

Companies such as Uber and Lyft provide an online platform or app that connects entrepreneurs and customers, along with services such as payment processing, marketing, a review or rating system and in some cases liability insurance. For the most part, they treat these entrepreneurs as independent contractors, although lawsuits filed by Uber and Lyft drivers and cleaners claim they should be classified as employees.

Luscombe is not sure why either company is using 1099-Ks. “It’s probably not the way the 1099-K was originally envisioned,” he said. But if Uber and Lyft “are contending they are not even in a contractual relationship with these drivers, that the contract is really between the driver and the rider and they are just facilitating the payment, then the driver is neither an employee nor an independent contractor,” he said. In that case, a 1099-K could be appropriate.

It’s also not clear why some companies (such as Uber and Airbnb) send them to all workers whereas others (such as Lyft, RelayRides and TaskRabbit) send them only to those who exceed exceed the $20,000 and 200 transactions threshholds.

“Both positions are viable” until the IRS provides further guidance on this complicated matter, Langer said.

Many ways to report income
Here’s how some on-demand companies reported income to workers and the IRS in 2014:

Uber: All drivers who completed at least one trip in 2014 got a 1099-K.

Lyft: Drivers who gave at least 200 rides and generated at least $20,000 in ride receipts got Form 1099-K. Drivers who earned at least $600 from bonuses, mentor training and reimbursements got Form 1099-MISC.

RelayRides: People who use its platform to rent out their cars got a 1099-K if their reportable payment transactions exceed $20,000.

GetAround: Issued a 1099-MISC to any car owner who generated more than $600 in rental income.

Airbnb: Issued Form 1099-K to all hosts who rented out homes or rooms.

VRBO/HomeAway: Did not issue 1099s because it does not process payments for people who rent out homes on its platforms.
TaskRabbit: People who earned more than $20,000 and completed more than 200 tasks got a 1099-K from Braintree, the firm’s payment processor.

Handy: Sent 1099-MISC to anyone who made more than $600.

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