The 2017 Tax Cuts and Jobs Act made sweeping changes to taxes and how they are calculated. This is good news for most workers in the gig economy. Whether you’re a freelancer, a consultant, an entrepreneur, or all three, you stand to pay less in taxes for 2018 and beyond. Here are four ways gig economy workers can benefit from this historic tax reform:
- The 20 Percent Income Deduction
Most workers in the gig economy report income on their personal tax forms. This is commonly called “pass-through” income. Everyone knows that the new tax legislation slashed corporate tax rates (from 35 to 21 percent). But the law also allows individuals with pass-through income to deduct up to 20 percent of that income off the top. Unless renewed, this allowance is set to expire in 2025.
This is good news for workers in the gig economy as it greatly reduced tax liability for pass-through income. Note that there are income thresholds, above which you can’t deduct the 20 percent ($157,500 for single filers, and $315,000 for married couples filing a joint return). There are also limitations on claiming the deduction for many service businesses, such as doctors, lawyers or financial services companies.
- Higher Personal Deductions
The new law nearly doubles the standard deduction (from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for joint filers). It also eliminates the personal exemption and increases child tax credits. Many taxpayers who used to itemize personal deductions – including gig economy workers – are now expected to take advantage of the higher standard deduction. In many cases, that will mean paying less taxes.
Note that personal deductions are different from business deductions. You can still deduct all allowable expenses for your business, in addition to taking the standard deduction.
- Health Insurance Mandate Going Away…Eventually
If you happen to be young and healthy, or you rarely take advantage of services or procedures typically covered by health insurance, you may have felt that the Affordable Care Act (ACA) was treating you unfairly. Under the ACA, you had to either buy insurance or face a penalty. This was called the “individual mandate,” and it affected virtually every worker in the gig economy.
New legislation has eliminated the individual mandate, meaning you can no longer be penalized for not having health insurance. If you decide not to carry health insurance, that’s your prerogative. Be aware, though, that the health mandate is still active for 2018, and will only be eliminated for 2019 and beyond. For 2018, the IRS penalty for not having health insurance is $695 per adult or 2.5 percent of household income in excess of tax filing thresholds, whichever is higher.
- Companies Are Spending
As noted, companies are getting a huge tax break this year and beyond. Already, they’re flush with cash. Many companies are using those extra dollars to grow their business or invest in development. That’s good news for many workers in the gig economy, who are being hired by companies to supplement permanent work forces.
Ideally at least, as more Americans retain a bigger chunk of their paychecks, they’ll spend that money on goods and services. This, too, could be good news for the gig economy, as more money should change hands and end up in the pockets of gig economy workers.
Paying taxes and managing finances are as important for a worker in the gig economy as they are for anyone else. In fact, they may be more important. The help and advice of a qualified accountant can go a long way toward ensuring that your tax forms are properly prepared and that you gain all the benefits you’re entitled to.