Failure to Contribute: An Estimate of the Consequences of Non- and Underpayment of Self-Employment Taxes by Independent Contractors and On-Demand Workers on Social Security

Abstract

While existing academic and government research has focused on the size, growth trajectory, and labor and tax law implications of independent contractors, freelancers, and workers selling goods and services online and through app-based platforms (the “on-demand” economy), less work has been devoted to quantifying the Social Security implications for the on-demand economy and its workers. Although it is known that self-employed workers have tax compliance and reporting issues, the existing reporting rules applicable to most workers earning income in the on-demand economy substantially increase the likelihood that these taxpayers are failing to contribute to Social Security and Medicare through payment of the self-employment tax (SE tax). As such, this paper sheds light on the Social Security implications of current federal tax rules for independent contractors generally and, in particular, workers earning income through occupations occurring in the on-demand economy by estimating the population and earnings of these workers using the U.S. Census Bureau’s redesigned Survey of Income and Program Participation (SIPP).

By analyzing 2014 SIPP data, we identify a population of self-employed, non-employer respondents working outside of a traditional employment relationship (“independent contractors”), as well as individuals working in occupations in the on-demand economy (“on-demand workers”). SIPP data have the potential to capture workers who earn income using on-demand platforms to connect with customers and process payments (“on-platform work”), as well as workers who earn income in occupations occurring in the on-demand economy who do not use on-demand platforms (“off-platform work”).

Additionally, with SIPP data, we are able to estimate the income that independent contractors and on-demand workers earned in these employment relationships in 2014. Using Internal Revenue Service (IRS) data on the tax gap, U.S. Treasury Department audit data on underpayment of the SE tax, and survey data on tax compliance by on-demand economy workers and the self-employed, we are able to create an estimate of how much SE tax should have been paid on this income but likely was not. To provide context for our findings, we applied the methodology we developed to estimate the likely underpayment of the SE tax to data published in 2018 by the U.S. Bureau of Labor Statistics on the number of independent contractors and on-platform workers in 2017. In addition, using SIPP, we were able to provide supplemental demographic data on independent contractors and the on-demand platform workforce.