The Trump administration’s Tax Cuts and Jobs Act is now in effect. But how will it impact taxes for independent contractors?
Did you know that there are over 57 million freelancers in the United States? In fact, experts project that freelancers will make up more than 50 percent of the American workforce by 2027.
Thanks to companies like Uber and Lyft, freelance positions were already on the rise. However, the passage of the Tax Cuts and Jobs Act (TCJA) by the United States Congress has only accelerated this growth.
In 2017, the number of freelance workers increased by over 8 percent from the year prior. One reason for the accelerated growth is the TCJA and its positive changes to taxes for independent contractors. Read on to learn how the TCJA affects freelance workers.
How Does the TCJA Improve Taxes for Independent Contractors?
For starters, the TCJA lowers the tax rates in each income bracket. This means that Uncle Sam is taking less of your freelance income.
Prior to the TCJA, a single filer earning $100,000 per year paid a tax rate of 28 percent. This same individual, for instance, now pays a 24 percent tax rate.
In addition to lower rates, the TCJA also allows freelancers to deduct more from taxable income. This is because of a new provision in the tax code that allows for a 20 percent deduction of freelance earnings.
After the taxable income is reduced by 20 percent, the lower tax rates are applied. This results in a two-pronged benefit to independent contractors.
Take for example a freelance writer that earns $45,000 per year. With the changes to the tax code, experts project this individual will save roughly $1000 in annual taxes.
Who Stands to Benefit?
Freelancers or independent contractors do not officially work for a business. Instead of a traditional boss-employee relationship, freelancers are independent. These individuals enter into contractual agreements with customers looking to fill a service need.
In the past, the freelance workforce was largely comprised of occupations like journalists and photographers. Also, independent contractors were commonly found in the service industry performing blue-collar jobs like carpentry or plumbing.
However, there has been a recent paradigm shift in the freelance community. This shift was caused by the creation of gig workers that accept work through apps on a mobile device.
Companies like TaskRabbit or Lyft hire independent workers this way. Not only is it easy to assign work, but it reduces a company’s overhead as they no longer need to provide office space or benefits. The company has less responsibility and only needs to do minor tasking like create pay stubs.
The number of gig workers is rapidly expanding. By 2020, over 7.5 million Americans will be in the gig economy. This represents a doubling since 2015 when there were just 3.2 million gig workers.
Wrapping It Up
The changes to taxes for independent contractors may accelerate the growth in this industry. Not only will workers benefit from lower tax rates, but they can also deduct 20 percent of their earnings from taxable income.
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