Today is Tax Day and millions of Americans are rushing to file their taxes on time. It’s a challenge made more difficult by a complex filing process–especially for independent contractors. These workers lack an employer who withholds taxes from their paycheck throughout the year, and many do not receive documentation of their earnings. Most are expected to predict their annual income in advance and make estimated payments four times per year. April 15th marks the first of these quarterly deadlines for 2019–and if an independent worker did not make quarterly payments last year, their entire annual tax bill is due today.
One provision of the 2017 Tax Cuts and Jobs Act (TCJA) intended to help small businesses and independent workers adds to the complexity, and could worsen inequities among workers. Section 199A of TCJA, known as the qualified business income or “pass-through” deduction, allows some business owners and independent contractors to deduct up to 20 percent of their business income from their federal income tax, intended to mirror the sizeable corporate income tax cut that larger businesses received.
The deduction, though, comes with a series of restrictions and limits that complicate the process of claiming it. Limits are imposed, for example, on jobs that rely on specialized training or skills–a vague category open to multiple interpretations. Accurately claiming the deduction requires either expertise or the financial resources to hire an experienced accountant. For those without those resources, the deduction presents an added maze to an already complex process. The Tax Foundation found the rules of the deduction to be complex, and predicted that they will “arbitrarily favor certain economic activities over others,” while simultaneously failing to prevent abuse. The complexity also means that the taxpayer savings of the deduction will not be distributed equally. The Tax Policy Center estimates over 90 percent of the savings will go to the top quintile of income earners, with almost 30 percent of savings concentrated among the top 0.1 percent.
Tax policy should boost transparency and simplicity for workers in all arrangements–not make things more complicated. Toward that end, last year, the Future of Work Initiative published an issue brief, “Tax Simplification for Independent Workers,” aimed at updating the U.S. tax code to make filing simpler, increase income transparency, and increase compliance. The brief offers policy suggestions to mandate reporting of income to all workers making more than $600, introduce optional withholding for independent contractors, and create a standard business deduction.
In addition, policymakers can consider promoting better tools to help all workers navigate the system, like offering free electronic filing with IRS software and pre-populated forms based on prior returns. This year, legislation passed in the House that prohibits the IRS from developing these sorts of tools, leaving e-file options in the hands of companies who profit off the system’s complexity. The IRS should be able to pursue solutions that make it as easy as possible for taxpayers to file accurately and expediently, regardless of their work arrangement. It shouldn’t be this hard.