Breaking Down Tax Reform: 3 Things Independent Contractors Need to Know
If you’re currently working as an independent professional, here are three things you should know about the new law.
1. Section 199A
Section 199A is a new portion of the tax code that provides a tax benefit for pass-through entities, meaning businesses where profits are passed through from your business to your personal income tax return.
The tax law changes mean that many independents may be able to deduct up to 20% of their qualified business income. This is known as the net passive income from your business.
2. Calculating Your Deduction
The potential deduction for most independents is equal to the LESSER of:
- 20% of qualified business income (sometimes referred to as “QBI”) or 50% of the business’s W-2 wages (whichever is less), OR
- 20% of the individual’s 1040 taxable income, less capital gains
3. Restrictions and Exceptions
When it comes to calculating your deduction, there some important details to understand.
The 20% deduction does not apply to specified service trades—a trade or business where the principal asset of the business is the reputation or skill of one or more of its employees or owners. Some examples of service trade industries include health, law, consulting, and financial services.
However, there is an exception. If your pass-through income is below a certain threshold—less than $157,500 or $315,000 if filing jointly—any trade may take advantage of the deduction.
Proceed with Caution
Further direction is still needed in order to clarify specifics for the new tax law. The IRS is expected to issue new guidance this summer which should tell you how all of this will work.
In the meantime, we recommend consulting your legal or accounting professional before making any changes to your current practices.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.