Earlier this month we wrote about how the new Federal tax cuts may actually put a little bit more money in your take-home pay starting now. However, what does this mean for freelancers?
Well, it isn’t necessarily bad but it is a little complex. The benefit of the cut allows taxpayers to reduce their taxable income by about one-fifth and this includes “pass-through” or business income meaning small business owners or anyone who is their own boss AKA freelancers. Now if you make a ton of money then it gets complicated but if you are a pretty average freelancer you may actually save a lot of money this year. We talked with Su Panya of FreshBooks, a great accounting resource for small business owners and freelancers, about what freelancers need to know about the 2018 tax cuts.
You can deduct 20% of your reported income
You pay taxes on business profits at their marginal income tax rate (which can be as high as 39.6 percent) plus the self-employment tax or the net investment income tax of 3.8 percent. The new benefit allows you to deduct 20% of your reported income.
How to claim your deduction
2018 tax forms aren’t released yet, but it’s likely you’ll apply the 20% deduction in Schedule C of Form 1099. Like usual, when you report your 1099 income from clients, you’ll still fill out expenses for items like travel, rent and supplies on Schedule C.
Work for a service field or outsourcing industry? You’re ineligible. Sorry.
There are two major categories NOT covered by the benefit: 1. self-employed workers in service fields (healthcare, accounting, law, for example), and 2. workers who move from gig to gig and are paid from an outsourcing agency.
How much you should expect to save
It depends on how much you earn (and whether you work in the service field). An unmarried freelance editor with no kids making $50,000 would owe just over $10,200 in federal taxes, about $1,800 less than they would have before the bill passed.
It includes part-time freelancers. YASSSS!
If you have a 9-5 as a main source of income, you can still be eligible for the tax break. The benefits apply to extra money you on the side as a freelancer—so any work you’d report in Form 1099.
For more tax tips for freelancers go here.