If you’re a contract worker, a change in the 2018 tax code could positively affect you. After speaking with Ramon Vasquez, an H&R Block Tax Advisor, we found the income tax deduction under the new tax code and how to maximize its benefits. He also gave some tips and shared advice to help organize and better prepare for tax season.
The new tax laws are going to have a huge impact this year. One of the newest components for individuals who are self-employed is the income business deduction, allowing you to take up to 20% off of your business income as a deduction.
Just about anyone who has either a Schedule C, a partnership or an S Corporation qualifies for the business income deduction.
There is an exclusion that happens for income more than $315,000 for married filers. There are restrictions if you’re in the health field, an actuary or performing. Once you get to a certain income level, the deduction starts to phase out. It’s not that people are completely excluded but that once you’re in that category, as your income rises you could see a reduction in the deduction percentage.
I think when most people get a 1099, they’re not too familiar with the concept of it, or how it needs to be reported. It’s really anyone who isn’t a formal employee who has taxes withheld as a W-2 employee. When you’re on a 1099 basis, as a part-time or gig worker, you’re considered self-employed. You receive your entire pay, with nothing withheld for taxes or other benefits such as unemployment insurance. You spend that income, including any business expenses, and at the end of the year you reconcile what are deductibles expenses and what taxes you owe.
Assume that at least 15% of the gross amount you make from your 1099 income may be deductible. Most people who are self-employed and receive a 1099 income form have applicable expenses whether they realize it or not. People need to understand you don’t necessarily have to spend money on your business in order to have business expenses. When you’re self-employed there are a lot of things that make the expenses you have qualify as business expenses. It could be a cellphone, vehicle mileage or a portion of your living space that you use as an office. One of the best things would be, even for people who choose to file themselves, to reach out to a professional.
They increased the amount, and it went up possibly 50 percent to 100 percent, maybe from half a million to a million or three quarters of a million to a million. It’s not something you see in the everyday tax world and it could cover durable items such as office furniture, computers or other business machines.
The qualifying business income deduction is the only new one. I think what’s most important is for the self-employed individuals who pay expenses. These earners can deduct expenses that W-2 employees no longer are able to deduct. Anyone who is claiming unreimbursed employee expenses including mileage, per diem, uniforms, tools, anything like that they use in their regular job, are no longer able to deduct as expenses. Only self-employed are allowed those deductions.
We’re in the app age. There are so many things that are available now that weren’t fifteen, ten even five years ago. I’m kind of a traditionalist, I always come back to filing spreadsheets. There are more efficient ways of streamlining those processes, where you can take pictures of receipts, and receipts get uploaded via an app or software. TaxBot is one of the ones that I’ve worked with somewhat in the past. I think it has a really good blend of features that are user-friendly. It allows people who are self-employed to get into the process of thinking about formal bookkeeping without having to spend the money on formal bookkeeping software.
The other thing would be tracking your business mileage. There are a lot of apps now that didn’t exist a few years ago that make it easier. MileIQ is, I think, one of the first ones that comes to mind for the same reasons that I like TaxBot.
This article is not intended to substitute professional tax advice. Always consult your with financial advisor or tax professional.