Etsy exec: Tax reform leaves out entrepreneurs of the gig economy

Editor’s note: Althea Erickson, head of advocacy and impact at Etsy, wrote this opinion piece in response to tax reform bills being considered in the U.S. House and Senate. The opinions expressed in this commentary are the author’s alone.

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For all the talk of tax reform that’s swirling around Washington, D.C., there’s one group that’s been conspicuously absent from the debate — the self-employed, microbusinesses and freelancers who make up the gig economy.

Take Etsy sellers, for example. Eighty-seven percent of them are women, and the vast majority are sole proprietors working out of their homes. Individually, they may be small, but together they make a large economic impact. Etsy plays host to more than 1.8 million creative entrepreneurs on our platform, who together sold $2.84 billion in goods in 2016.

Althea Erickson, Etsy

That’s a big economic engine, one that becomes even larger when you consider trends driving more people toward self-employment and gig work. The Government Accountability Office estimated that 40.4 percent of the workforce in 2010 was composed of contingent workers operating outside traditional employment.

Economists Lawrence Katz and Alan Krueger report that there was an increase of 9.4 million workers in “alternative work arrangements” over the last 10 years.

Unfortunately, the tax reforms currently under consideration in Congress don’t benefit or even seem to consider this important and growing sector of the economy.

For example, most microbusinesses are not structured to benefit from proposed corporate tax rate reductions and do not earn enough income to benefit from pass-through business reforms.

But we know that taxes are a major pain point for the self-employed and that they desperately need reforms that simplify their taxes and make it easier to start and grow their businesses.

Major overhauls to the tax system only come around once a generation. As we contemplate reforms to modernize our tax code, it would be a remarkable oversight to exclude those who will drive the future of our economy. Here are some concrete ideas for Congress to consider:

Establish a standard deduction for microbusinesses

Collecting and itemizing expenses is costly and time-consuming for a business of one. Kathleen DeLaney Thomas of the University of North Carolina School of Law recently published a paper proposing a new standard business deduction for the gig economy.

Much like the standard deduction that individuals can take to simplify their income tax compliance burdens, a standard business deduction for microbusinesses would reduce the amount of paperwork and administrative burdens they face, freeing up time to create new products, attract new customers and grow their businesses.

Enable tax withholding for 1099s

The payroll system dramatically simplifies tax compliance burdens for those with traditional employment, but excludes the 15 million Americans who are self-employed or are independent workers. Congress should allow individuals whose income is reported through a 1099 to optionally withhold taxes from their pay.

To include more individuals, policymakers could also harmonize the reporting thresholds for 1099-MISCs and 1099-Ks and establish different reporting thresholds for the retail and service sectors to ensure the reform does not unintentionally capture non-business owners.

Streamline flexible spending accounts

One of the major challenges of self-employment is managing unpredictable income fluctuations. To help microbusinesses manage unexpected expenses, Congress should streamline existing federal pre-tax savings programs into a single MyFlex account, accessible to the self-employed, where an individual could set aside up to $13,620 in pre-tax income per year (the sum of allowable savings under existing programs).

He or she could use that money to pay for qualified medical, dependent care, transportation and parking expenses. Allowing individuals to roll over the balance in their MyFlex Account, year over year, would also incentivize asset building over time.

This proposal would not increase government spending, as it merely streamlines existing federal pre-tax savings programs.

Expand the Earned Income Tax Credit

The Earned Income Tax Credit is an important source of income protection, and because it is not administered through payroll, it already works equally well for gig workers and those in a more traditional employment relationship. Congress should expand EITC eligibility by lowering the eligibility age from 25 to 21, establishing a higher credit for childless workers and eliminating the marriage penalty.

Additionally, Congress should allow the EITC to be calculated and administered on a quarterly basis rather than taking the benefit in a lump sum distribution, which would better support workers struggling to manage short-term income volatility.

Reduce new entrepreneurs’ tax burdens

The early years of entrepreneurship can bring several unwelcome tax surprises, from the Self Employment Tax, which doubles the incidence of the FICA tax owed to the IRS, to the requirement to pay taxes quarterly.

Congress should reward new microbusinesses by establishing a New Entrepreneur Tax Credit that offsets self-employment tax liability in the first two years of reporting self-employment income.

Congress could further reduce the burdens new entrepreneurs face by eliminating the penalties for failure to file quarterly estimated taxes in the first years of self-employment.

Taken together, these reforms would dramatically ease the tax burdens faced by members of the gig economy and ensure our tax code works not just for big business, but for the microbusinesses that will drive the 21st-century economy.

Althea Erickson is the head of advocacy and impact at Etsy. This opinion piece originally appeared on thehill.com