One question weighs on the minds of freelancers—is working for myself the best choice or should I be working for an organization full time? The freelance lifestyle certainly has its challenges, such as insurance concerns, lack of 401k access, IRS payments, and the need for fastidious bookkeeping. But, could the 2018 tax law offer unforeseen perks?
As it turns out, yes! The Tax Cuts and Jobs Act (TCJA) will apply to so-called “pass-through” income until the law expires in 2025. This measure was intended to promote hiring and investment by small business owners, but applies to anyone who works for themselves, including partnerships, S corporations, and sole proprietorships. It allows a freelancer to remove 20% from the income reported to the IRS, even if that freelancer takes the standard deduction—now doubled to $12,000 for single filers. How much an individual or couple will save is determined mostly by his, her or their yearly income.
That’s big. 20% of freelancer or business income won’t count toward total taxable income. One need not even freelance full-time to claim the benefit; even if one’s main income is derived from a salaried job, any side income should be eligible for special tax treatment.
There is a call, however, to ensure that wealthy, self-employed professionals who aren’t likely to do much hiring or investing won’t receive the same hefty tax cut. For example, the law does not apply to workers in service fields such as healthcare, accounting, or law. Another important distinction is that workers who appear to be freelancers, yet are paid as employees through an outsourcing agency, will not be eligible for the TCJA benefit. Many companies misclassify employees as contractors, because it makes them cheaper to use. Labor advocates worry the TCJA will encourage more employers to use the new tax benefit to entice employees into this false status, generating more legal violations.
Broadleaf offers programs that identify bona fide independent contractors and provide classification assistance per IRS standards. In addition, Broadleaf:
- Allows organizations to proactively stay ahead of new state legislation
- Ensures proper documentation with ICs, e.g., confidentiality agreements, certificates of insurance, debarment status, confirmation of eligibility to work in the U.S., etc.
- Offers tools to streamline approvals and payments against deliverables and project milestones
- Reduces chances of a government audit
Freelancers are looking forward to the new 20% benefit, but remember that ICs must be properly classified. We’re here to help.