The Tax Cuts and Jobs Act brings mixed news for side-hustlers
We’ve been focusing a lot, lately, on people who work for themselves. After all, people who choose to make their side-hustle their main hustle are the backbone of our economy! In fact, according to sba.gov, 73.2 percent of small businesses are sole proprietors, and 52 percent are home-based.
We’ve been talking, too, about the new tax law — the Tax Cuts and Jobs Act — and how it will affect small business owners. This is part three of that blog series, where we examine how independent contractors are affected.
Not being experts on tax law ourselves, we turned to three Maryland CPAs to walk us through the good, the bad, and the confusing of the Tax Cuts and Jobs Act: Dan Thrailkill, director at Ellin & Tucker; Jim Wilhelm, director at SC&H Group; and Beverly Bareham, president of Bareham CPA. If you haven’t yet, be sure to check out part one, 4 Ways the Tax Cuts and Jobs Act Benefits Small Businesses and part two, 3 Limits to Deductions: A Major Downside of the Tax Cuts and Jobs Act for Small Businesses. And best wishes on those working on their 2017 taxes!
As small business owners themselves, independent contractors will find both good and bad news in the new tax law. The repeal of Section 199, as previously discussed, may hurt some who’ve relied on the deduction in the past to help write off costs.
On the flip side, though, being able to take that new 20 percent deduction on their own taxes, if they qualify, could be a really nice benefit.
As to whether or not that 20 percent deduction is a good enough reason to quit one’s job and become a self-employed independent contractor, both Wilhelm and Thrailkill say the new tax reform bill should not be the defining factor in making such a big life decision.
“Starting your own business shouldn’t be done for tax purposes, as the risks involved outweigh most tax benefits,” says Wilhelm. “That said, I think more people will want to have their own business entity to take advantage of the QBI deduction. … W-2 income is more expensive than business income, for many businesses going forward.”
Thrailkill agrees, cautioning employees not to assume becoming a contractor will be easy. “There are pretty specific rules in the law as to whether or not you’re allowed to change your status from employee to independent contractor,” he says. “For me, I’m an employee of Ellin & Tucker. I can’t just be an independent contractor because it’s more tax beneficial.”
Of course, most people looking into independent contracting might not be as concerned about contracting for their current employer as they are with quitting their job to pursue a new passion. Still, “If they’re going to make [their side-hustle] their main business, I would recommend they do that for themselves, not just because of the tax ramifications involved,” says Thrailkill.