Posted by Larry Hurt

Working In Gig Economy, Know Your Tax Breaks

Working In Gig Economy, Know Your Tax Breaks

In a perfect world, we earn all our income by doing something we love. Whether it's raising puppies, kites, or training young athletes, nothing beats receiving a paycheck to do something you would only do for pure pleasure. It's a good deal even if you only earn a few dollars.

But when it comes to the IRS, every penny generated is a taxable income.

The labor market economy is snowballing, with workers representing 34% of the US labor force. This number is assumed to increase to 43% by 2020.

Working in a gig economy offers some benefits, such as flexible work schedules, higher earning potential, and the opportunity to look for a second job or business idea that you are passionate about. Due to the latest round of tax reforms, workers in the gig economy are now more likely to seek short-term work or self-employment, in the form of a substantial tax holiday.

Tax reform and Pass-through deduction of 20%

The 2017 Tax Cuts and Jobs Act (TCJA) provides for several tax changes to benefit citizens. Still, some are intended to reduce corporate tax liabilities. One of the most significant is the deduction of the transfer of 20% of qualified business income for qualified companies.

In essence, this deduction allows businesses to deduct up to 20% of their direct income above. Reduced taxable income can reduce the amount of taxes owed by a business. The deduction has been specifically designed to benefit the transferred entities, including individual companies, corporations and corporations, and LLCs.

The deduction claim applicable to service companies, such as physicians, lawyers, or financial services companies, is limited. In general, any business may claim a total deduction of 20% if it is considered a transferor entity, submits an individual return, and generates taxable income of $157,500 or less during the year. The income limit increases to $315,000 for couples reporting a joint profit.

Service companies whose income exceeds these limits may still claim the deduction, but the amount of income eligible for the deduction will be phased out. Once an individual filing reaches $207,500, and the couples reach a taxable income of $415,000, the deduction disappears. Based on income limits, the deduction is primarily designed to provide maximum benefits to small businesses outside the service activity category.

The pass-through deduction is intended to help small businesses that do not directly benefit from the corporate tax rate reduction from 35% to 21%. Gig economy workers are now included in the group of interested business people.

What does the Pass-through deduction mean for workers in the Gig economy?

Although the 20% pass-through deduction distinguishes service companies, it does not prevent workers in the gig economy from benefiting from them. Indeed, the new tax law effectively creates a loophole that allows workers in the gig economy or the self-employed to claim a deduction and pay less tax without having to incorporate their activities in a specific way. You can benefit from the new deduction if you are an Uber driver, a freelance writer, or a programmer.

So how does the individual deduction for workers in the gig economy work? If you report business income on Form 1040, you can deduct 20% of the qualifying corporation's net income. Qualified business income is any income generated by your business or work that does not come from an investment. The qualified net income of corporations represents income after the deduction of any loss or expense.

Although the deduction refers to individual companies, you do not need to hire yourself as a worker to take the deduction. You have to follow the income guidelines for tax return status and have a pass-through income. It is the income tax based on the personal tax rate, not the corporate tax rate. Therefore, if you work as a sole proprietorship without employees, you can claim a deduction.

Tax planning for Gig economy

The new bill came into effect in early 2018, and it's never too early to start thinking about your financial strategy for the coming year. If you are part of the gig economy, you may want to ask yourself if you need to expand your gig business to increase your income and benefit from a higher tax exemption.

However, keep in mind that you always pay income tax as a freelancer or gig income. If you regularly work, in addition to performing your duties together, you must ensure that your employer withholds sufficient income tax to cover any additional charges that may be due to your earnings. Otherwise, you would be responsible for the payment of income tax and the self-employment tax on the money earned. As of 2018, the self-employment tax is due to an income of at least $400 received from self-employment. The current tax rate is 12.4% for social security and 2.9% for Medicare taxes.

If you are considering expanding a gig economy company or becoming a full-time gig, you should also find the estimated quarterly payments. The IRS requires companies (including the self-employed) to divide taxes due throughout the year into quarterly installments. If you do not make these payments on time or if you do not pay enough, the IRS may add a penalty, which will increase the amount of tax owing.

It is a good idea to talk to a tax professional if you do not know how you can get the maximum transfer deduction of 20% as a worker in the gig economy. They can also help you identify other tax exemptions and benefits that may reduce your bill or result in a larger refund.

Larry Hurt
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