Those American workers who are self-employers, or freelancers in the fast-growing “gig economy,” could see financial windfalls if the U.S. tax code revisions proposed by the Trump administration this week become law.
Freelancers should probably consult a reputable accountant to consider incorporating their business. The top rate for federal corporate taxes would drop to 15 percent, from 35 percent, under the announced overhaul. And the administration wants small businesses to enjoy the benefits of those cuts. Those small businesses often encompass a single freelancer.
To be clear, it’s way too early for all freelancers and self-employed people who earn their income via 1099-MISC IRS forms to rush out and incorporate themselves as the big tax cut looms. For one thing, few to no details on the tax plan have yet to be released by the administration. But on the surface there are clear advantages if the proposals are ever approved by Congress.
The potential windfall in tax savings for freelancers and self-employed people hinges on the so-called “pass through” income as it is distributed through a formal partnership, S-Corp (the simplest type of corporation you can form) or a limited liability company (LLC).
The income distributed to the individual who owns the partnership or company would be taxed as normal personal income, not the 15 percent. Once you’ve paid yourself a reasonable salary, and the Internal Revenue Service could launch an audit if the salary seems unreasonably low, then the remaining income could qualify for the lower pass-through rate as the entity’s profits.
This opportunity to “game the system,” writes the New York Times’ Neil Irwin, stems from the gap between the tax rate paid on individual income — up to 39.6 percent now, and the low rate on business income the president proposes of 15 percent.
Writes Irwin: “This mind-bending curiosity of the tax code could undermine the very idea of a job as we know it — or, arguably, accelerate a shift that has been underway for years.”