The new tax law of 2018 is bringing good news for the people that are working as contractors and a good reason to change from a W-2 salary based employment to a contracting based payment. The reason for the change is the 2017 Trump tax reform. Categorizing your job as a “1099 contracting” would be in most cases a better choice than keeping the salaried job. The pass-through deduction is the magic word.
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Forms and Associated Taxes for Independent Contractors
What are 1099 and W-2
If you are an employee or self-employed, work full time or part time, you define as W-2 salary. 1099 are those that work as independent or freelancer. You can have a regular job with a W-2 wage and do some freelancing at the same time under 1099 contractor.
Before the last tax reform, W-2 was considered a better option as it had lower tax rates than a contractors taxation.
Go on 1099 contractor job you get your paystubs
The W-2 employment conditions had more benefits like 401K matching and healthcare. Their employment was considered safer so that it was considered a safer situation.
The radical tax reform, made by Trump changed the situation for 1099 contractors. They still have fewer benefits and less job security. The change for contractors and self-employed is about paying fewer taxes on the same earnings; it is so as long you are at high-income levels that permit you to keep more money in your hand as a compensation for the higher benefits and security of regular employment under W-2. Before you leave your permanent job, remember that part of the extra money that you can have by paying fewer taxes you must keep in savings or pay better health insurance or similar benefits that you had as a W-2 employee.
1099 tastes better
How to compare the equivalence of the pay? W-2 vs. 1099
Equivalent Pay is not only put one dollar in-front of one and a half dollar. A dollar paid under W-2 regular employee worth more than the dollar paid under 1099 contractor. The difference is made by the fact that the employer pays half of the Social Security tax on behalf of his regular employee. For example, a $100,000 salary is equal to $107,650 for a contractor pay only because of the 7.65% Social security tax paid by the employer. The contractor with the same $ income of $100,000 will have to deduct all the 7.65% tax on his salary as a Self-Employment Tax. Additional money needs to cover the 7.65% and more for the benefits. Health care as an independent is one important issue to cover. 2018 Instructions for Form 1099-MISC.
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Now we have a new factor to take into account; The tax reform permits the Pass-Through deductions for a 1099 contractor to save thousands of dollars in taxes, you can see below how:
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Pass-Through Deduction under the 2017 GOP tax reform:
The new bill calculates a 20% Pass-Through deduction of the “qualified business income” though it can not exceed the 20% of the difference between taxable income and any capital gains. Large itemized deductions and capital gains will limit your deductions.
Business owners of S-corporations, LLCs and partnerships can use the pass-through deductions, The 1099 contractors and freelancers, side hustlers, and sole proprietors can enjoy too the pass-through deductions.
Anyone that is paid in another way that is not W-2 or owns a C-corporation can be qualified for this deductions.
You are on W-2 salary self-employed click for paystubs
Deduction for pass-through is calculated as below:
1. The 20% of qualified business income minus your business expenses
2. The 20% of the difference between the taxable income (before pass-through deduction) plus your capital gains.
Reporting self-employment income to the Marketplace
The 1099 contractors or self-employs that have no other substantial sources of income have more limited benefit from new law pass-through deduction. The reason is the that the 20% taxable income before the pass-through deduction and fewer capital gains is a smaller amount because taxable income is after all deduction. One more issue is if you have large itemized deduction or capital gains, it can shorten your pass-through deduction. We will see below that the pass-through deduction can be a huge advantage for being a 1099 contractor or self-employed.
Adjusted Gross Income (AGI) is defined before deduction of pass-through, it means that your self-employment tax will not be reduced. Your state income tax depends on the state you are paying taxes.
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Have you chosen 1099 freelance or contractor? Be happy! Your federal income tax will be reduced in a few thousands of dollars. See below.
Independent Contractor Defined
Saving good Dollars in Taxes
Exploit 1099 low tax rate and save your Dollars from being devoured by taxation. Here’s what that looks like for an individual earning $100,000 as an employee, or the equivalent $107,650 as a 1099 contractor:
Table of compassion: W-2 vs 1099
|W-2 Salary||1099 Contractor or Self-Employed|
|Social Security or Self-Employment Tax FICA||($7,650)||($15,210)|
|Self Employement Tax Deduction||$0||($7,605)|
|20% Pass-Through Deduction||$0||($17,608)|
|Amount of standard Deduction||($12,000)||($12,000)|
|Total taxable Income||$88,000||$70,436|
Happy 1099 contractor
For the 2018 tax year. In this model, the 20% pass-through deduction is limited by 20% of the excess of taxable income before the deduction, fewer capital gains. The way it is calculated is 20% x (AGI minus the standard deduction). Includes all self-employ.
1099 can be a good option for all the gig industry people. Many people are writing, doing graphics or SEO for websites. All these jobs are paid directly to the gig working persons by credit cards or other internet payment options. The tax must be paid correctly to avoid hard question from the IRS. A micro company or another way of financial organization shold be used to make tax payments.
Paystubmakr.com team hopes that you enjoyed reading this blog.