Logos of various gig companies

Behavior

Self-employed Lose Some Social Security

Self-employed and gig workers who fail to report all of their earnings to the federal government will pay a price: a smaller monthly Social Security check when they retire.

Gauging the magnitude of this problem is tricky since the IRS doesn’t know how much is not being reported by a group of workers not easily identified in the available data. As a first step, new research derived estimates of the unpaid self-employment taxes that result from the under-reporting, using a combination of U.S. Census data on the workers’ incomes and past studies on the prevalence of the problem.

Specifically, the researchers found that more than 3 million self-employed people – construction contractors, small business owners, and other independent contractors – did not disclose some or all of their earnings to the IRS in 2014. This under-reporting translated to unpaid self-employment taxes of $3.9 billion to Social Security and another $900 million to Medicare.

An additional 2.3 million Americans sell goods and services on platforms like Airbnb, Lyft, and Etsy every month. A large share of these gig workers are not reporting all of their income either. Their under-reporting resulted in an estimated non-payment of $2 billion to Social Security and $500 million to Medicare in 2014.

In fact, the estimates are conservative, and the true level of the missing payroll taxes is probably larger, said the study’s authors, a tax expert at American University and a private policy consultant.

Independent contractors are most likely to be baby boomers over 55, while Generation Xers are more common on the online platforms. Self-employed people fail to disclose earnings for a couple of reasons: they are confused about the tax law or they want to increase their disposable income. But responsibility also falls on the platform companies that process payments for their workers and sellers, the researchers said, because the companies are not required to file 1099 earnings forms with the IRS for a majority of their workers.

Whatever the reasons for the underreporting, self-employed workers will one day get less from Social Security. This study raises an obvious question for future research: how much less?

To read the entire study, authored by Caroline Bruckner and Thomas Hungerford, see “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?”

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

3 Responses to Self-employed Lose Some Social Security

  1. Tony says:

    This magnificent edifice is based on a sample of 61 returns!

  2. Jim Aulenti, ChFC says:

    It’s almost impossible to underreport income as every state follows IRS reporting and they share information; in every case ALL income in excess of $600 annual requires a 1099, so its unlikely the IRS does not know about income.

    Its much more likely the self employed person is netting down their AGI so as to reduce taxable income and income taxes thereupon.

    “What we tax we get less of, the less we tax we get more of.” Which is why when income tax rates go down, income tax receipts go up. Which is why excessive income taxes drive people away, as CA, NY, NJ, CT et. al are learning.

  3. Mike Mas. says:

    People who sell on eBay or at flea markets can always under-report sales (if they report them at all) and over-claim on costs.

    Anecdotally, I knew a store owner who decided in his final years to greatly overstate his income, pay extra into Social Security, having done the math to determine how much that would increase his Social Security benefits!