Are you a self-employed 1099 Employee? If so, you may be aware that the new tax law has notable changes to the way independent contractors are taxed.
The 2018 Federal Tax Reform offers significant amendments to the tax liabilities and benefits afforded to 1099 contractors, reversing a longtime tax advantage previously held by W-2 employees. These tax changes can mean substantial savings for 1099 workers, provided certain guidelines are met.
Want to learn more about the changes and possible benefits the Tax Reform can afford 1099 employees? Here’s a brief overview:
What is a 1099 Employee?
The 1099 tax form allows for individuals to self-direct their own business. This individual is known as an independent contractor.
Accountants, photographers, hairdressers, and tradesmen are all examples of occupations where independent contractor arrangements are typical.
How Does The New Tax Law Affect 1099 Employees?
A 1099 form allows subcontractors the opportunity to deduct ordinary, necessary, and legitimate business expenses that they incur for their contract work on their taxes. Anybody who receives a 1099—either box 1, box 3 or box 7—has the ability to essentially file a small business return with their individual taxes, known as a Form Schedule C.
Once 1099 income grows to a certain level, the taxpayer has the ability to fully deduct expenses against that self-employed revenue.
Compared to the W2 Employee, under this new tax bill, the 1099 is the only type of income that allows for one hundred percent tax deductions. Whereas W2 Employees, on the other hand, are no longer allowed to deduct any of their non-reimbursed business expenses—nothing outside of the standard mortgage interest, property taxes, and charity.
Do 1099 Employees Have New Benefits Under the 2018 Tax Reform?
The most significant benefit 1099s can receive under the new tax law is a deduction known as the 20% pass-through deduction. This deduction can essentially give 1099s who qualify the potential to deduct 20% of their business income.
There are other limitations on deductible pass-through income, such as upper income limits, investment income, and foreign earnings. Likewise, you must legitimately be a self-employed 1099 subcontractor (you cannot be a W2 Employee and subcontract on the side). To see if you qualify for the new pass-through deduction, make sure you consult with a tax professional for specific guidance on which of your sources of income apply.
***Are you a 1099 contractor or are you considering becoming one? Call us today at (818) 242-4888 or schedule your free 30-minute consult now. Robert Hall & Associates is a leading 1099 tax preparer and consultant serving Glendale, Burbank, Pasadena and the Greater Los Angeles area. Our team of enrolled agents can guide you through the self-employed tax filing process and advise you on locating and gathering the documentation you will need.
Interested in learning more about the new tax laws? Find out our top 25 facts you need to know about the 2018 Tax Reform.
Are you planning for the future? Learn what new federal regulations may impact your current and future financial goals.