Tax law’s new 20 percent pass-through deduction may provide a break to the estimated 40 million gig economy workers and freelancers in the U.S. who work as sole proprietorships and partnerships. However, before everyone who fits into this category starts celebrating, there are important issues that need to be considered:
The income threshold
The amount for an independent freelancer’s pass-through profit is $157,500 for a single person and up $315,000 for a married person.
Employee classification still an issue
The IRS has dedicated a lot of resources to determining who is actually an employee and who is a contractor, and will continue to do so in the future. To avoid running afoul of the IRS, businesses who use freelancers and workers who work freelance may need help to be clear on the qualifications of employee vs. contractor and make sure that they are classified properly.
Most do not understand it
According to website AccountingToday.com, a majority of the people who operate a small business do not feel like they are prepared for the new tax system, yet more than half do not seek professional help to better understand it.
Other Important findings:
- 36 percent of freelancers admit that they don’t pay taxes
- 10 percent of freelancers don’t even know that the new tax plan exists
- 25 percent of freelancers feel that the changes will mean more taxes
These issues will go into effect for 2018
Since the House of Representatives passed the new U.S. tax law on November 16 and the Senate passed it on December 2 of 2017, these changes did not impact those filing by April 17 of 2018. Ideally, the following year will give freelancers and businesses who use them time to get up to speed on the changes. This can come from doing research on your own, or working with someone with a background in finance.