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How Will the Gig Economy be Affected by Tax Reform?

Posted on in Taxation Law

San Jose tax lawyer, gig economy, tax reform, tax cuts, independent contractorsFollowing the passage of the Tax Cuts and Jobs Act of 2017, financial experts across the United States have been working to understand the full impact of this historic legislation. Much of the discussion surrounding the tax reform bill has focused on how its changes to tax law will affect large corporations (which have seen a reduction in the corporate tax rate from 35 percent to 21 percent). However, the growing portion of the country’s population that participates in the gig economy should also understand how it will be affected.

Taxes for Independent Contractors

Surveys have shown that there are 57 million people in the United States who currently perform freelance work either full-time or part-time, including people who earn an income in the gig economy (also known as the sharing economy), such as drivers for Uber or Lyft or people who rent their property through Airbnb. As independent contractors, these freelancers may be able to take advantage of new tax deductions.

The Tax Cuts and Jobs Act allows pass-through companies (in which the business’s profits are taxed as income at the business owner’s personal tax rate) to take a 20 percent deduction from their taxable income from a trade or business. The trade or business requirement excludes investment income from the 20 percent deduction. An independent contractor can claim this deduction as a sole proprietor or if he or she establishes himself or herself as a limited liability corporation (LLC) or S-corporation.

This deduction will apply to individuals who make less than $157,500 per year, or married couples who make less than $315,000. Independent contractors will also be eligible to deduct health care premiums and business expenses from their taxable income.

By combining this change with the increased standard deduction of $12,000 for individuals and $24,000 for married couples, freelancers may see some substantial benefits. However, they should be aware they may still be required to pay self-employment taxes. Certain occupations are not eligible for the 20 percent deduction, including accountants, doctors, lawyers, performing artists, and athletes if income exceeds certain amounts.

Contact a San Jose, CA Tax Attorney

Independent contractors who either operate their own business or work for larger gig economy companies may be able to take advantage of the changes made by the Tax Cuts and Jobs Act to achieve some large savings on the taxes they pay. However, determining the best way to establish yourself as a corporation and take the correct deductions while meeting your self-employment tax obligations can be a complex matter.

John D. Teter Law Offices can work with you to ensure that you are making the most of the deductions available to you. Contact our San Jose tax lawyer today at 408-866-1810.

Sources:

https://www.bostonglobe.com/business/2017/12/22/the-gig-economy-gets-its-own-tax-break/rLU6WQQZ7fiMQAMx0ep4IM/story.html

https://mic.com/articles/186972/the-gop-tax-bill-could-create-a-nation-of-freelancers#.UbPUORBtv

https://www.accountingweb.com/practice/clients/how-to-help-freelancers-benefit-from-the-new-tax-law

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