Failure to Contribute: Independent Workers and Social Security

Mar 12, 2019 / Amanda Chase, Horsesmouth Assistant Editor

While existing 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. 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).

A recent research paper from the Center for Retirement Research at Boston College found that approximately 7.1 million individuals were independent contractors, and 3.1 million individuals were on-demand workers in 2014. We estimate at least 3.1 million independent contractors underreported self-employment income in 2014, resulting in approximately $4.8 billion in SE tax that should have been paid, with approximately $3.9 billion constituting non-payment of Social Security contributions. Additionally, we estimate that $2.5 billion in SE tax was not reported or underreported by on-demand workers, which translates to $2.0 billion that was not paid into Social Security.

This underpayment of SE tax could undermine efforts to fund Social Security and translate to lower Social Security benefits for these workers upon retirement. With the advent of the on-demand economy and its workforce, these problems have grown exponentially, notwithstanding efforts to increase tax compliance through additional information reporting. Congress could take steps to modernize information reporting, update quarterly estimated payment requirements, and require distribution of tax guidance to help combat underreporting of self-employment income and support the solvency of Social Security.

Find the full abstract and research paper here.


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