With all the outcry over tax reform, it can be hard to believe that there's anything good here to cover. But if you're self-employed, it's worth a closer look. While it's impossible to categorize anything as objectively "good," freelancers will find a number of personal benefits buried in the bill.
First and foremost, let's start start from the top.
For anyone who isn't so familiar with tax terms, a
is an amount that you can subtract from your taxable income.
Under the new bill, sole proprietors can itemize deductions for business expenses, including office supplies or travel. So, if you spend $2000 on business trips, you can deduct that amount from your taxable income.
Where previously sole proprietors were taxed as individuals, they can now qualify as pass-through businesses. Thus, if you're a freelancer earning less than $157,500 (or $317,000, if you're filing jointly), you'll be automatically eligible for a 20 percent tax deduction on your pre-tax income if you file as a sole proprietor.
Basically, you'll be taxed as if you make 20 percent less than you actually do. So, take Alex and Genevieve,
who are both earning $70,000 annually, as examples. Under the current tax plan, they both fit firmly into
the $37,950 to $91,900 tax bracket
where they pay taxes at a rate of 25 percent. But now, under the new
plan, the tax brackets' full facelift puts these $70,000 earners in the $38,701 to $82,500 bracket, where
they're taxed at a rate of 22 percent.
But as a sole proprietors, it's not that simple — their 20 percent deductions means that each of their total
is $56,000. So, if Alex and Genevieve were to pay taxes on their $70,000 like full-time employees, they'd
each owe the full $15,400. But since they can leave 14k out of the equation, they only owe $12,320 a piece
— allowing each of them to keep an extra $3,080 that would have gone to the government.
Since the upper limit doubles for those filing jointly, both Alex (our married freelancer) and Genevieve (our single freelancer) are affected equally.
And if your deduction knocks you down a bracket, it could yield even more tax savings.
For instance, if you're a freelancer earning $100,000 per year, you fall into the new tax plan's $82,501 to
$157,500 bracket, which is taxed at a rate of 24 percent. But in this case, your 20 percent deduction knocks
your total taxable income down 80,000 and into a new
with a tax rate of 22 percent. While your
full-time counterparts owe $24,000 on their $100,000 salaries, a 20 percent deduction plus 2 percent saved
from dropping down a bracket brings your total owed to $17,600, or just 17.6 percent, and saving you upwards
So, as you can see, the Republican tax plan is making it very tempting to take your skills to the freelance market.
While the bill does happen to benefit freelancers, that wasn't exactly its intention. Rather, it's meant to benefit "pass-through companies" like LLCs, sole proprietorships, and S corporations, which are typically owned by the ultra-rich. It just happens that freelancers, contractors, and the self-employed are the bycatch inadvertently pulled up by this gold-plated net. And thus, there are a number of places where freelancers slip through the cracks.
Remember those deductions discussed above? Well, not all deductions are created equally. In past tax law iterations, freelancers could itemize deductions — meaning that they could deduct certain expenses from their taxable income.
For instance, if an actor spends $200 per month traveling to auditions, he could subtract $2,400 from his yearly income. Assuming our actor in question is in the same tax bracket as Alex and Genevieve — taxed at a rate of 22 percent — that would allow him to pocket an extra $528 each year.
Now, freelancers can't file for miscellaneous itemized deductions for things like travel or
marketing materials. A few itemized deductions that show up on the 1040 Schedule A form will be
particularly affected in the 2018 year. For example, Job Expenses and Miscellaneous Deductions that
exceed 2% of your adjusted gross income (AGI) will be
However, a sole proprietor or
business owner will typically file a 1040 Schedule C form, so the deductions made will not be affected by
the deductions eliminated on the Schedule A form.
So while $2,400 doesn't exactly seem like a lot compared to the 20 percent deduction, it can mean a world
of difference to a freelancer who (a) works in a profession that requires many of these
or (b) earns a low annual income.
Let's take a look at how salary might affect that outcome.
A young artist who earns $35,000 per year falls into the second lowest tax bracket, where she pays a 12 percent income tax, or a total of $4,200. With the new tax laws, the 20 percent deduction means that she'll leave $7,000 out of her taxable income, adding an extra $840 to her bank account. But art materials are expensive, and she frequently travels to shows — if she spends more than $7,000 annually on all professional expenses, the standard 20 percent deduction hurts her more than it helps.
Meanwhile, a more established artist might incur similar business costs while earning four times the income, meaning that her 20 percent deduction would be much more likely to make up for the difference. In her case, as long as she spends less than $28,000 per year, her standard deduction will be worth it.
Ultimately, this change disproportionately affects low-income earners and professionals who have more business-related expenses.
While healthcare isn't directly affected by the tax bill, it does face an uncertain future because of it. It eliminates the individual mandate, which taxes uninsured Americans. Now, at the outset, it might sound like it's intended to add insult to injury — but it's actually just the opposite. The individual mandate incentivizes everyone to purchase health insurance, so no Americans forgo coverage for the sake of the money. This adds more young, healthy Americans into the insurance pool, bringing down insurance costs for everyone. Doing away with the individual mandate is estimated to increase the healthcare costs by as much as 10 percent.
Since freelancers are typically tasked with paying for their own health insurance, they see and feel the full cost of their health care. Thus, if you're a freelancer in America, prepare for the cost increases that will follow the elimination of the individual mandate.
A Few More Things to Bear in Mind
Remember that income isn't everything. While cash is certainly nice, it's definitely not king. There are many more aspects of financial health that a 20 percent deduction just can't account for.
Think workers' compensation, pension plans, 401(k)s, or the ability to start a union. All of these things affect the way we save, spend, and live, and all of these things are contingent upon full-time employment. Plus, sole proprietors aren't able to bargain collectively or take advantage of federal worker protections.
Uber Driver vs Restaurant Server Study Methodology
As a result of tax reform, Uber drivers in various cities have the opportunity to claim a 20 percent tax deduction by filing as sole proprietors as opposed to filing as employees. We used Glassdoor to gather information on the average yearly salary of Uber drivers and restaurant servers in 15 of the biggest cities in the US, and then calculated how much Uber drivers would save with the 20 percent deduction if they filed as sole proprietors. We compared the difference between the two professions in terms of how much income they had to pay taxes on pre and post tax reform, to show how the tax plan will allow groups of individuals with similar or equivalent salaries to come out ahead of others based on filing status.