The Working-For-Yourself Windfall
Kiplinger's Personal Finance|August 2018

The new tax law allows many self-employed workers to deduct up to 20% of qualified business income.

Sandra Block
The Working-For-Yourself Windfall

IF YOU’RE SELF-EMPLOYED OR HAVE A side gig, you could qualify for one of the most generous provisions in the tax overhaul enacted by Congress late last year. But if you don’t already have an accountant or tax preparer, you might need one, because this tax break is also one of the most complex provisions in the Tax Cuts and Jobs Act.

The break could benefit millions of sole proprietors, small-business owners, freelancers and gig workers, who “pass through” their business profits (or losses) to Schedule C of their individual tax returns and pay individual tax rates. Starting this year, many of these taxpayers will be allowed to deduct up to 20% of their qualified business income—net income after they’ve claimed business deductions—before they calculate their tax bill. For example, if you’re self-employed and earn $100,000 in qualified business income this year, you could be eligible to deduct $20,000. If you’re in the 24% tax bracket, that would reduce your tax bill by $4,800.

You don’t have to itemize to claim this new tax break. The deduction won’t reduce your adjusted gross income, nor will it reduce your earnings for purposes of calculating taxes for Social Security and Medicare, says Nathan Rigney, a research analyst at H&R Block’s Tax Institute. (Unlike employees who work for someone else, self-employed workers must pay the full 15.3% of self-employment taxes, although they can deduct half of the amount from their AGI.)

Congress made this change in an effort to create tax parity between small-business owners and big corporations. The Tax Cuts and Jobs Act cut the corporate tax rate from 35% to 21% but only reduced the top personal tax rate from 39.6% to 37%. Excluding 20% of qualifying income effectively cuts the top rate from 37% to 29.6%.

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