The Tax Cuts and Jobs Act provides incentives for self-employed individuals. This includes sole proprietorships and partnerships. But taking advantage of benefits requires awareness of the availability of deductions one can take. It also means understanding the imposed limits the law places upon taxpayers.
This new law provides a 20 percent pass-through deduction. Pass-through taxation means an individual can report income on their individual return rather than on their business return. It can mean avoiding double taxation for income.
Eligibility for the pass-through deduction
The threshold for business income in receiving this deduction is $157,500 for single individuals and $315,000 for married couples. This could be good news for a number of Michigan contractors.
As more businesses rely upon contractors than in the past, we will likely see the number of independent workers increase. A large number of workers are affiliating themselves with “gig economy apps” to earn income. This includes businesses such as Lyft and Uber.
Unfortunately, many self-employed individuals do not understand the benefits for which they are eligible under the new law. Many do not avail themselves to outside assistance, and they may not understand the new tax provisions.
Also, the new tax law contains a number of caveats. In the event someone goes over the income threshold for this deduction, many self-employed individuals will not be eligible whatsoever for the deduction. Also, the IRS will continue to keep a close eye on classifications of workers to determine whether one is actually an independent contractor or a full-time employee.
The downsides of being self-employed
Anyone starting their own business already understands the headaches that come along with it. Self-employed individuals must consider health insurance enrollment, building a retirement savings account, and paying additional Social Security taxes.
Currently, many workers look for ways around the healthcare issue by enrolling on a spouse’s policy, or looking for alternate methods for gaining healthcare coverage. While there may be changes in legislation to make it easier for self-employed individuals, much of this is only in the proposal stage.
Because of the challenges in being self-employed, such individuals will likely need to take advantage of every break they can find. Also, it’s important that when applying for tax deductions, you file your tax returns correctly. Experienced tax attorneys can assist.