Author Topic: Effects of TCJA on freelancers  (Read 756 times)

kristof

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Effects of TCJA on freelancers
« on: March 04, 2018, 04:02:54 PM »
Like some others on these boards, I'm a freelance software developer. I'm trying to understand the effects of the new US tax laws on what I'll pay for 2018.

My business is a pretty vanilla sole proprietor LLC. If I'm reading the guide below correctly, 20% of the first $157,500 of profit I make this year will be tax free. Is that correct? Am I missing any exceptions/things I need to look out for?

https://blog.freelancersunion.org/2018/01/04/how-the-tax-cuts-and-jobs-act-impacts-freelancers-2/

Since this will potentially affect both how much I work (i.e. it's an incentive to stay below $157,500) and how I work (incentive to stay away from W-2 positions as the salary bar will be higher compared to 1099 income) I figured I'd try to get ahead of this early in the year, and perhaps advice from the more tax-savvy can help others in my position too. Thanks in advance for anyone with relevant advice!

SeattleCPA

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Re: Effects of TCJA on freelancers
« Reply #1 on: March 05, 2018, 06:53:01 AM »
The Sec. 199A deduction--the 20% deduction you reference--should save you big on your taxes. But it's more complicated that your post describes. Here's the blog post I did back when law passed that goes into key details:

https://evergreensmallbusiness.com/pass-thru-income-deduction-dozen-things-every-business-owner-must-know/

But note that it's your taxable income that needs to be below $157,500 (if you're single) in order to get the deduction. That means that you can probably make quite a bit more than $157,500 if you have deductions, use a pension, take the self-employed health insurance deduction, etc

Slow&Steady

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Re: Effects of TCJA on freelancers
« Reply #2 on: March 12, 2018, 03:27:09 PM »
Like some others on these boards, I'm a freelance software developer. I'm trying to understand the effects of the new US tax laws on what I'll pay for 2018.

My business is a pretty vanilla sole proprietor LLC. If I'm reading the guide below correctly, 20% of the first $157,500 of profit I make this year will be tax free. Is that correct? Am I missing any exceptions/things I need to look out for?

https://blog.freelancersunion.org/2018/01/04/how-the-tax-cuts-and-jobs-act-impacts-freelancers-2/

Since this will potentially affect both how much I work (i.e. it's an incentive to stay below $157,500) and how I work (incentive to stay away from W-2 positions as the salary bar will be higher compared to 1099 income) I figured I'd try to get ahead of this early in the year, and perhaps advice from the more tax-savvy can help others in my position too. Thanks in advance for anyone with relevant advice!

Do you know if this only applies to Federal Income Tax or does the pass-thru deduction reduce FICA liabilities too?  Also the cut-off applies to total householde taxable income or just the companies taxable income?  Is there anything unique that I should be concerned about if Spouse A is a W-2 earner, Spouse B runs an LLC, and there is a rental property (not under the LLC)?

SeattleCPA

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Re: Effects of TCJA on freelancers
« Reply #3 on: March 12, 2018, 06:03:25 PM »
Sec. 199A doesn't save you FICA.

Also the deduction gets complicated but it's either 20% of your taxable income or 20% of your qualified business income, whichever is less.

There's lots of info at my blog about this deduction BTW...

mathstach

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Re: Effects of TCJA on freelancers
« Reply #4 on: March 14, 2018, 04:21:18 PM »
The Sec. 199A deduction--the 20% deduction you reference--should save you big on your taxes. But it's more complicated that your post describes. Here's the blog post I did back when law passed that goes into key details:

https://evergreensmallbusiness.com/pass-thru-income-deduction-dozen-things-every-business-owner-must-know/

But note that it's your taxable income that needs to be below $157,500 (if you're single) in order to get the deduction. That means that you can probably make quite a bit more than $157,500 if you have deductions, use a pension, take the self-employed health insurance deduction, etc

I read your informative blog post and have a question.

How does the Sec. 199A deduction affect solo/individual Roth 401(k) contribution limits, if at all?

Specifically, if I take the Sec. 199A deduction, I save on tax, but does it also reduce how much I can put into a Roth 401(k)?

For example, say I had (five-figure W-2 wages and) $18,000 of self-employment business income on my 1040 for 2017.
Then my self-employment tax deduction would be $1,272, so my earned income from self-employment would be $16,728.

Hence, in that scenario, I could contribute up to $16,728 to my solo/individual Roth 401(k); I'd also pay $2,543 in SE tax, plus whatever my usual federal and state taxes would be.

Now, again hypothetically, say those income figures occur for 2018.

Would I still be able to contribute up to $16,728 to a solo/individual Roth 401(k) if I wanted to?

Or, would the Sec. 199A deduction, while reducing my federal and state taxes, also lower my maximum retirement contribution threshold?

MDM

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Re: Effects of TCJA on freelancers
« Reply #5 on: June 27, 2018, 06:49:31 PM »
How does the Sec. 199A deduction affect solo/individual Roth 401(k) contribution limits, if at all?
Not at all.  The 199A deduction occurs as part of Form 1040.

QBI Pass-through deduction in the case study spreadsheet might be useful.