Much of the interest in tax reform has centered on the benefits to big businesses, from the lower corporate tax rate to repatriation of overseas profits. But the Tax Cuts and Jobs Act, signed into law on December 22, 2017, may also be a boon to the legions of freelancers, contractors and other workers in America’s growing “gig economy.”
Under the federal tax overhaul, everyone from ride-share drivers to freelance designers can expect to see their taxes simplified due to a doubling of the standard deduction, to $12,000 for individuals and $24,000 for joint married filers.
“This will have the effect of simplifying taxes for a large percentage of the gig economy, and the broader economy, as the benefits of itemization are subject to a higher threshold,” said Brandon Smith, Wealth Strategist, UBS Advanced Planning. For many filers, that could mean “no accountants, no math.”
Another major benefit: Many workers who have incorporated as pass-through businesses can expect a reduction in their taxable income due to the law’s 20% deduction on qualified business income for those entities.
“Pass-throughs are really the vehicle of choice for the gig economy—and they underpin the broader U.S. economy,” Smith said, noting that many gig-economy workers operate as pass-through entities for legal or financial reasons. “Now, there may be a corresponding tax benefit.”
The broader economic impact of these changes could be significant. An estimated 57.3 million American workers, or more than one-third of the U.S. workforce, are freelancing and contribute approximately $1.4 trillion annually to the economy, according to a survey by Upwork and Freelancers Union.1
The changes in the tax rules come at a time when Americans are fascinated with entrepreneurialism. According to the latest UBS Investor Watch survey2, half of wealthy investors believe owning a business is one of the most prestigious careers to pursue, now and in the future. A full 72% of Millennials would consider starting a business, enticed by the independence of being their own boss, the opportunity to pursue their passion and the potential for financial gain.
Smith believes the tax breaks could give aspiring entrepreneurs the boost they need to take that first step. The new law “makes the tax bite smaller” in a business’s nascent stages, he said. And the pass-through rules assist with the 20% deduction as the business grows. “So from birth to growth, we’re seeing a more attractive environment.”