What Freelancers Need to Know About the GOP Tax Plan
Business owners, big and small, are the clear winners of the House and Senate tax bills currently being negotiated on Capitol Hill, leaving some freelancers and independent contractors questioning what the tax revision means to them – and whether they should consider. registration question. What’s the correct move?
Naturally, this is difficult and depends entirely on your financial situation, although several experts advised not to do anything until the bill is finally agreed. The situation is still changing and we will find out more in the coming weeks.
But in short, this is why freelancers might consider joining. Currently, “through” small businesses – especially S corporations and limited liability companies / LLCs – are taxed at the individual owner tax rate, which could be as high as 39.6% for 2017. the individual tax rate remains at 39.6%, while the tax rate for pass-through taxes will be capped at 25% – a significant difference (the Senate bill does not lower this rate). Details of who / what type of business qualifies as cross-cutting (e.g. law firms would not be covered by the House of Representatives bill) are still being negotiated.
Here’s an example of how setting up an LLC can pay off, according to David Hrick, a tax attorney , provided the House regulation is adopted:
If you own an LLC that makes $ 300,000 a year, you can pay yourself a salary of $ 100,000. This salary will be taxed at your regular rate. As usual, you will pay Social Security taxes, medical care taxes, and Unemployment Insurance Tax on this income. However, the remaining $ 200,000 in profits will be taxed at the rate of 25 percent with no additional employment taxes. If you are in the 35 percent tax category, using this method will lower your tax bill.
Obviously, not everyone will benefit from this. It will likely only pay off if you are making a very high income – to get into the top 39.6% group, you will need to make at least $ 418,400 this year, or $ 1 million under the House plan. “If you’re in the inferior category, setting up an LLC / S Corp may not be a headache,” says Susan Lee, a tax and financial advisor based in Manhattan. You will need to hire an accountant, attorney and pay hundreds of dollars in royalties .
“Don’t act on an article on the Internet written by someone you don’t know,” says Lee. “Check with someone you trust and don’t go crazy about it.”
Plus, it’s not just your taxes that you need to worry about – there are also legal implications when deciding which business is right for you. “When you become an LLC or S Corp, the rules change a little and this can complicate your tax situation more than you expect,” says Jenna Ivanoski, product manager for TaxAct, a tax filing company. “It may end up costing you a lot more money to file your tax return, so in the end it may not be worth it.”
There are, of course, troubling aspects of billing for both freelancers and employees. House’s version taxes the tuition of graduate students who are rejected by universities, and both bills are designed to encourage people to use a standard deduction (which, in effect, doubles) rather than listing personal deductions, which could have serious implications for charitable donations.
And those in the personal health insurance market have a real cause for concern. Again, nothing has been set in stone yet, but the Senate version is revoking the individual mandate of the Affordable Care Act for the 2019 tax year, meaning that premiums for people in the individual market will increase by about 10%, according to the Congressional Budget Office.
If you make $ 48,240 or less (or your family of four earns less than $ 98,400), then federal subsidies, at least in the short term, can make up the difference. But if you are part of the roughly 15% of Obamacare contributors who earn more, you are likely to receive a full premium increase. In this case, you can eat up all the costs or completely cancel your insurance.
One potential benefit for the gig economy workers, Simon Philip said: The Senate proposal raises the depreciation limit for business vehicles from $ 3,160 to $ 10,000 in the first year of operation, which could benefit Uber and Lyft drivers. CPA.
In any case, Steve Rosenthal, a senior fellow at the Urban Brookings Center for Tax Policy, says there is no need to do anything in a hurry until the law is passed. “Next year we will find out more.”