If you work from a home office, there are plenty of expenses you can deduct from your tax bill to save money. Don’t miss some of the most common.
If you were paying attention in debate season, you know a couple of things: candidate Trump had some strong opinions about taxes, and a lot of them had to do with business. Other than that, what do we know about Trump’s tax plan? Officially, not much at all.
“Trump hasn’t come out with his new plan, so we don’t really know what it is,” says Eric Toder, Co-director at Urban-Brookings Tax Policy Center.
Presidential candidate Trump did release a proposed tax plan last autumn, but President Trump has yet to reveal anything further. Right now, all experts can do is speculate on what could happen if his plan is put into place. So what will it mean for the gig economy and the people working in it if Trump gets his way?
What is the plan?
There are some major changes coming if Trump’s plan goes into place as-is. Marginal tax rates would drop, standardized deductions would increase and business taxes would go down—way down. Taxes for people in all income levels would decrease, but top earners would definitely, well, come out on top.
Right now, there are seven income tax brackets, meaning people pay anywhere from 10 percent to 39.6 percent. These are marginal—that means if you earn one dollar more than the cap for 10 percent income tax, you pay 15 percent (the next bracket) only on that dollar.
In Trump’s plan, the number of tax brackets would drop from seven to three. Though the actual levels of income aligned to these brackets is in question, we’ll use the numbers that have been reported on for the sake of having an example. For single filers earning less than $37,500, the tax bracket would be 12 percent. Earned income between $37,500 and $112,500 would be taxed at 15 percent. (Remember, this is marginal—it’s only the income after the first $37,500 that is taxed at 15 percent.) Anything above $112,000 would be taxed at 33 percent.
The biggest part? Right now, the top corporate tax rate is 35 percent. Under Trump’s tax plan, all businesses would be taxed at 15 percent. If that sounds like a huge change, it’s because it is.
What it means for freelancers
If you didn’t know the top corporate tax rate was 35 percent, there’s good reason: freelancers and individual contractors pay individual income tax, not corporate business tax. Freelancers, individual contractors and sole proprietors are called “pass-through entities.”
“Self-employed individuals typically report their business income on their individual income tax forms, and pay the same tax rates on their business income as they do on their other personal income,” says Scott Greenberg, an analyst at the Tax Foundation. “As such, self-employed individuals fall into the broad category of ‘pass-through businesses,’ businesses that are subject to the individual income tax, rather than the corporate income tax.”
Put simply, for tax purposes the income passes through the business, directly to the owner. The benefit of this is that owners avoid paying double tax, unlike C corporations which pay tax at a corporate level, and then again at a personal level.
From what we know so far, Trump’s plan would allow pass-through entities to choose to file as a business instead of as an individual. Actually, it’s one of the few things there is relative clarity on. On his site, under a document titled “Tax Reform That Will Make America Great Again,” it says:
“No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15 percent of their business income in taxes.”
So yes, if this plan goes into place, freelancers could pay 15 percent tax across the board. For people earning less than $37,500 (again, for the sake of an example), it would still be better to file as an individual, given that individuals would pay 12 percent and businesses pay 15 percent. But for people earning in that middle tax bracket, depending on exactly how much they are earning, they may benefit from filing as a business. All this could mean a flooding of the freelance marketplace. “As a general rule it would expand the gig economy and it would reduce the amount of straight out employment because people would try to shift into self-employment status,” says Toder.
Toder also thinks that there might be a domino effect of people joining the gig economy, even if it doesn’t benefit them financially. “If the gig economy is expanding and fewer employers are offering traditional jobs, it might be that other people end up shifting to the gig economy as well, even though they’re not getting a benefit from this,” says Toder.
Before you start celebrating
If we all had a nickel for the number of times we’ve heard candidates champion small businesses, there wouldn’t be any more small businesses—we could all afford to retire. Is this finally a break for the little guy?
Maybe, and maybe not.
First, it’s unlikely this was actually designed to help entrepreneurs and hustlers in the gig economy. Most of the savings would still go to the highest earners.
“If it affects self-employed people at all it will be as a ploy to pass large tax cuts for large businesses while holding up the small business ‘slash’ self-employed person as the reason this bill has to pass,” says Rus Garofalo, the founder of Brass Taxes, a tax preparation service that works with freelancers. “The self-employed person will save a few hundred dollars a year and large corporations will save millions.”
But whether or not this benefit is intentional, it’s still a benefit. The problem that experts foresee is that it may open doors for people to cheat the system. An employee in a permanent position could quit his or her job, and come back the next day, to the same desk, the same email account and the same workload, as an individual contractor. While it might not make a big difference in theory, the government could put systems in place to keep this from happening—after all, the more people who file as businesses, the bigger the loss to the government. Those systems could have a negative impact on legitimate freelancers.
“There would probably need to be complicated administrative rules to prevent this sort of gaming, which could create higher compliance costs for self-employed individuals,” says Greenberg.
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