Gig economy workers aren’t expected to see a major benefit from recent GOP-backed tax reform until next year, but independent contractors can still help their cause this tax season by being diligent about their business expenses.
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The rise of companies like Uber and TaskRabbit has stoked a major expansion in the number of Americans working in the “gig economy,” which is expected to grow from 3.9 million workers at present to 7.7 million by 2020, according to Intuit. Rather than typical employees, independent contractors and freelancers are considered sole proprietors, or operators of a one-person small business. They receive a 1099-MISC form documenting their income from the business that hires them, not a W-2.
Independent contractors should keep close records of their business expenses throughout the year to maximize their deduction when filing taxes in 2018, according to Lisa Lewis, a CPA and tax expert for TurboTax. Costs related to business supplies, computer equipment, marketing software, home office gear and advertising are all deductible.
“One out of five people become self-employed every year and about one-third don’t deduct the business expenses they deserve,” Lewis told FOX Business. “Make sure you get the business deductions you deserve.”
Signed into law by President Donald Trump last December, the GOP-backed tax reform package slashed the corporate tax rate to 21% from 35%. The package also carried a benefit for independent contractors, who, starting next year, will be able to deduct 20% of their business-related income before paying a lowered individual tax rate.
In a hypothetical case proposed by the Los Angeles Times, a single Uber driver who earns $40,000 per year and makes use of the 20% deduction would save $960 in federal income tax.
“The biggest change for tax year 2018 [taxes filed in 2019] for independent contractors/freelancers is the 20% business deduction on qualified business income for self-employed, S-Corps, and partnerships,” Lewis said.
Some changes made in the reformed tax code will apply to filings this year. The medical expense deduction was lowered to 7.5% from 10%, and independent contractors are also able to expense property they acquired and used after Sept. 27, 2017.
Aside from keeping a close eye on business expenses, Lewis recommends that independent contractors keep clear records throughout the year to minimize their stress.
“Gather your business income, expenses, and deductible mileage in one place so you have it together when you sit down to file,” Lewis said.
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