How Does the New Tax Plan Affect Independent Contractors?

In 1985, Simple Minds released the song, Dont You (Forget About Me). Despite the most ridiculous looking dancing you can imagine (under a chandelier, in front of TV screens, adding to the mood ???), the video was nominated for two MTV Video Music Awards.

The preposterous dance moves are pretty simple, though, which seems fitting for a band named Simple Minds.

Simplicity is the overriding theme here. Despite the overall complexity of the newly enacted tax plan, one thing is simple: The tax plan is good news for independent contractors.

Simply put, the revised tax code grants favorable treatment to small pass-through businesses, including independent contractors. The plan favors contractors over employees. Here’s how:

Under the new plan, many independent contractors who operate as pass-through entities — including sole proprietorships, partnerships, and S corporations (such as LLCs) — will be eligible to deduct 20% of their business income. That means starting in 2018, 20% of their earnings are not taxable.

This 20% deduction starts to phase out when an individual business owner has earned $157,500 (or, for business owners filing jointly, $315,000). Above this level, the deduction is capped at 50% of the business owners’ payroll.

For example, suppose an individual independent contractor has an LLC, earns $200,000, and has one employee earning $50,000. The contractor (LLC) will not get the full 20% deduction ($40,000) but instead will see the deduction capped at 50% of payroll — $25,000.

Some types of businesses may not be eligible for the 20% deduction. Check with your tax advisor.

The bottom line is that the tax plan is good news for workers who operate as independent contractors. Contractors should take steps to ensure they are properly operating as pass-through entities, including by forming LLCs if appropriate. Contractors should also consider being retained through their LLC, rather than being retained individually.

[Please remember that this post does not contain tax advice or legal advice. If it helps, you can think of this post as something you heard from a crazy old drunk on the train. You wouldn’t consider that to be tax advice, would you? Consult with an attorney or tax advisor to determine how best to position yourself under the new tax plan.]

For more information on independent contractor issues and other labor and employment developments to watch in 2018, join me in New York on Jan. 30, Los Angeles on Feb. 27, or Cincinnati on March 28 for the 2018 BakerHostetler Master Class on Labor Relations and Employment Law: A Time for Change. Attendance is complimentary, but advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com, and list my name in your RSVP so I can be sure to look for you.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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