Feb 21, 2018
Ask a Freelancer: What Does the Tax Bill Mean for You?
If you’re self-employed, you probably have questions about shifting rates and deductions.
Most freelancers are generally sole proprietors, which means they work for themselves and don’t have employees or partners. But some independent workers can also set up more complicated business structures, including S-Corps or partnerships known as LLCs and LLPs.
Recent changes to the tax code have brought these partnerships into focus, and we’ll explain some of the changes.
You become a sole proprietor simply by earning income on your own, and filing a schedule C detailing that income on your tax form 1040. Generally speaking, S-Corps. and LLCs are a bit more complex. They can have employees or partners, and becoming one requires official incorporation.
In all three cases, however, no one is paying you a salary, and what you earn by writing stories, fixing cars, or hanging pictures for someone else essentially passes through to you as income, hence the name pass-through income. And it’s taxed accordingly.
How it was before: If you worked for yourself, or owned a small business, you used to be taxed at your individual rate, which topped out at 39.6%. You also paid self-employment taxes—to fund Medicare and Social Security—on top of that. Last year that amount worked out to a little more than 15% of wages earned, minus your deductions.
How it is now: Now anyone who reports pass-through income on their taxes will be able to deduct 20% from their individual income, as long as their income is less than $157,500 as an individual or $315,000, if they’re filing jointly. (You’ll still pay the same self-employment rate that you did last year.) Above that amount, the deduction begins to phase out.
What it all means: If you report any income on the Schedule C for 1040 Form, you’ll probably pocket a bit more cash. At least until December 31, 2025, which is when most of the personal tax breaks are scheduled to expire, including the tax cuts for S-Corps. and LLCs.
If you report any income on the Schedule C for 1040 Form, you’ll probably pocket a bit more cash.
Who can relax: There has been a lot of hype about the tax plan’s benefits to business, but if you’re a sole proprietor and think you might be better off as a single-member LLC or an S-Corp, sit tight for now. “Most of my clients don’t need to do much of anything if they earn under $157,500,” says Rus Garofalo, the St. Louis-based founder of tax preparation services company Brass Taxes, which specializes in returns for freelancers and artists.
Who should get help: The nuances of the new law are still being debated, so if you typically have a complicated tax return, now is a great time to touch base with your tax preparer.
There’s no need to tackle this all yourself. It’s always best to talk to a tax professional when it comes to a complicated return. The earlier in the year you check in with a CPA, the more time you’ll have to relax before Tax Day.
Stash Learn Weekly
Enjoy what you’re reading?
Why Companies Led By Women May Do Better
Advancing Black-Owned Businesses
Why Stash has Chosen Grayscale for Crypto in Smart Portfolios
How to Spend Less on Your Wedding Dress
Getting Smart About Holiday Shopping for 2021
Understanding Student Loan Forgiveness