These days, more and more Americans are earning income in the gig economy, where teleworking has become ubiquitous, collaborative workspaces abound, and working as an independent contractor is commonplace. And while this new way of earning a living has its pluses (no office politics, yea!) and minuses (no employer-sponsored benefits, boo!), it seems here to stay. So it’s nice to see that independent contractors – meaning freelancers – get some relief in the new Tax Cuts and Jobs Act: a 20 percent tax deduction on their freelance income.
A break for you as a small business freelancer
Whether you freelance as a wedding photographer, writer, Uber driver, or event planner, the new tax benefit applies to you – provided you report your freelance earnings as “pass-through” business income. What is pass-through income? It’s business income that is reported on your personal income tax return.
The new deduction is intended to give a boost to small business owners whose companies are organized as S corporations, partnerships, or sole proprietorships. And because as a freelancer you’re running your own business, most likely as a sole proprietorship, the new tax break applies to you. Even if you have a full- or part-time job with an employer, if you have freelance side income that is reported on a 1099 rather than a W-2, these tax benefits will likely apply to you.
But don’t get too smug. This part of the new tax law expires in 2025 (if Congress doesn’t change it first). And if your total taxable income exceeds $157,500 for individual taxpayers ($315,000 for married taxpayers filing jointly), the 20 percent deduction begins to phase out. It disappears entirely if your taxable income is more than $207,500 for individual taxpayers and $415,000 for those who file a joint return.
Is April 15, 2019 going to be even more complicated?
If you’re below the phase-out threshold, you won’t have to do anything complicated to get this deduction on your freelance income. Assuming you’re running your freelance business as a sole proprietorship, you’ll report your 1099 income, along with itemized deductions for related business expenses, on Schedule C of Form 1040 when you file your 2018 federal return. Tax advisers anticipate that the new 20 percent deduction will automatically be applied as you (or your accountant) complete your Schedule C. (Remember, the deduction takes effect on income earned in 2018, so you won’t be filing the new Schedule C until 2019.)
If your pass-through income comes from work as a specified service business – including accountants, lawyers, and many consultants – the rules and calculations are more complex. You’ll probably want to consult an accountant or tax attorney (assuming you aren’t one) to see how the new law affects you.
But if you’re a regular Joe or Jane freelancer – say, driving for Lyft or editing for Avvo – and you earn below $157,500 from all sources (or $315,000 for couples), you will likely be entitled to deduct 20 percent of your freelance income from your total taxable income. For freelancers who struggle to make ends meet, this tax break provides welcome relief.