How the New Tax Law Will Affect Freelancers and Small Businesses Going Forward
Many small business owners, freelancers, and entrepreneurs are wondering how the new tax laws will change their business taxes in 2018 and beyond. It is highly likely that the end result will be lower taxes for the vast majority of small business owners.
The great news is that the tax changes should reduce taxes for most small business owners. However, it does not make the Tax Code simpler or easier to understand. It’s more important than ever to leverage the tools available to small business owners to calculate your potential tax liability and reduce your tax obligation as much as possible.
Top 3 Takeaways
Here are the 3 main things you should understand about how the tax law changes can affect you and your small business:
- You can still deduct expenses like mileage, cell phone bills, utilities, office rent, etc.
- Self-employed entrepreneurs can now deduct an additional 20% of their income (after expenses) to reduce your tax rate
- You don’t need to set up an expensive business entity to take advantage of these new rules
All of the above come with certain limitations and caveats that are explained in detail below.
Below we’ve also answered the Top 3 most common questions about the new tax changes and help explain the most important new deductions available to entrepreneurs – in plain English.
- Are my old business deductions gone?
No! The new tax laws do not remove popular and valuable deductions like mileage, home office expenses, meals, travel, and entertainment. You can and should still track these expenses to help reduce your taxable income. If you aren’t already, try using a free app like Hurdlr to automatically track these expenses so you never miss another deduction.
The major change is a new, additional tax deduction available to small business owners, which is explained in more detail below.
The most important thing to know? The “20% pass-through” deduction does not prevent business owners from taking other deductions. Since the 20% is calculated only after you deduct other valid business expenses from your earnings, you can combine both.
The Big New Deduction For Small Business Owners
Starting in 2018, most small business owners will be able to take advantage of a big new tax deduction that helps keep more cash in your pocket.
The new law allows business owners to take 20% of their business income as a tax write-off. However, there are a lot of rules to be aware of in order to claim this deduction.
First off, if your business income (earnings - expenses) is below $157,500 for single filers or $315,000 for joint returns, you can take the full 20% deduction without restriction.
If your business income is over $157,500/$315,000, the rules become more complicated, and you may only be able to claim part of the 20% income deduction.
We definitely recommend consulting a dedicated tax adviser if your business meets these conditions to fully understand what you’re qualified to take in regards to the 20% deduction.
2. Do I need to create an LLC, partnership, or S Corp. to claim the 20% deduction?
No, you don't. The new deduction applies to any taxpayer who earns “pass-through” income.
By default, the IRS considers you a Sole Proprietor if you own or operate a business and haven’t created a formal entity. Importantly, Sole Proprietorship income is treated as pass-through income, so there’s no requirement to form a LLC or other entity to take advantage of this significant tax deduction.
While there certainly are benefits to forming a separate business entity -- primarily for liability and ownership reasons -- you will still be able to get the tax advantages of a pass-through without spending the time or money to create a separate entity.
3. Are there new tax rates for small businesses?
Pass-through income is still taxed at personal rates, just like the old tax code, however personal rates are now lower across the board.
Combining the "bonus" 20% deduction effectively lowers the top income tax rate on small businesses from 37% (top individual tax rate in new bill) to 29.6%, assuming the full amount is deductible. The effective rate equates to thousands or even tens of thousands of dollars in real tax savings for small business owners.
Here Are 16 Real Estate Agent Tax Deductions
Gig Economy Jobs Like Uber
As an independent contractor, driving for an on demand economy company gives you the ability make money with your extra time. Drive during your lunch break, at night, or during busy weekends – it’s up to you. However, these companies don’t only provide taxi-style services; companies like HopSkipDrive enable the driver to chauffeur kids to their activities around town, similar to a nanny. Other rideshare companies allow the individual to use their vehicle to make extra cash by renting it out or sharing a ride to work. If you have a car, then there’s an on demand economy opportunity out there for you.
Gig Economy Sites Like Airbnb
Make money off renting out your home, car, boat, tools, or almost anything with these sites like Airbnb. If you are out of town, make money while you are away. If you have free space in a home you live in, you can leverage that too. You can also choose specifically who you would like to rent to – say, a college sports fan. Check these hosting companies out below.
Gig Economy Delivery Jobs Like Postmates
Delivery jobs vary in their specific functions, but they all allow independent contractors like yourself to travel, create a flexible schedule, and deliver goods (as opposed to passengers). Jobs like Postmates give you the ability to work short gigs during times like your lunch break or at night, while others like Roadie allow you to use space in your car for somewhere you are already going to deliver a package.
Unskilled On Demand Jobs
If you’re looking to help someone out and make some quick cash, then this section is for you. These companies function as automatic lead generators: instead of finding gigs by yourself, these companies give you the gigs. If you enjoy working with people and assisting them with their problems, many of the companies listed allow you to do just that.
Gig Economy Jobs for Freelancers
Freelancing allows individuals to work wherever they want, whenever they want, with whoever they want. Freelance occupations range from bloggers, lawyers, chefs, stylists, caregivers, techies, and many more. If you like the freedom to travel and be your own boss, check out the companies below.
Rideshare Companies With Jobs Like Uber
As an independent contractor, driving for an on demand economy company gives you the ability make money with your extra time. Drive during your lunch break, at night, or during busy weekends – it’s up to you. However, these companies don’t only provide taxi-style services; companies like HopSkipDrive enable the driver to chauffeur kids to their activities around town, similar to a nanny. Other rideshare companies allow the individual to use their vehicle to make extra cash by renting it out or sharing a ride to work. If you have a car, then there’s an on demand economy opportunity out there for you.
Sites Like Airbnb
Make money off renting out your home, car, boat, tools, or almost anything with these sites like Airbnb. If you are out of town, make money while you are away. If you have free space in a home you live in, you can leverage that too. You can also choose specifically who you would like to rent to – say, a college sports fan. Check these hosting companies out below.
Delivery Jobs Like Postmates
Delivery jobs vary in their specific functions, but they all allow independent contractors like yourself to travel, create a flexible schedule, and deliver goods (as opposed to passengers). Jobs like Postmates give you the ability to work short gigs during times like your lunch break or at night, while others like Roadie allow you to use space in your car for somewhere you are already going to deliver a package.
Unskilled On Demand Jobs
If you’re looking to help someone out and make some quick cash, then this section is for you. These companies function as automatic lead generators: instead of finding gigs by yourself, these companies give you the gigs. If you enjoy working with people and assisting them with their problems, many of the companies listed allow you to do just that.
Freelance On Demand Jobs
Freelancing allows individuals to work wherever they want, whenever they want, with whoever they want. Freelance occupations range from bloggers, lawyers, chefs, stylits, caregivers, techies, and many more. If you like the freedom to travel and be your own boss, check out the companies below.
