Are many of your clients self-employed? The ranks are swelling thanks in part to the “gig economy.” According to Bureau of Labor Statistics (BLS) data from July, about 16 million Americans currently are self-employed. And a recent Pew Research Center report found that self-employed taxpayers and their workers collectively accounted for 30 percent of the nation’s workforce, or 44 million jobs in total.
Although self-employed individuals are generally treated like other business owners for tax purposes, there are several special issues. Your clients should consider the implications in the following four tax areas.
1. Income Taxes: Of course, you owe federal income tax from your self-employed business, just like other business owners, as well as state income tax in most jurisdictions. But you don’t have to pay tax on the full amount of your “profit” (i.e., the difference between the payment received and the cost of good sold or services provided). If you maximize the available deductions—for example, the Section 179 and bonus depreciation deductions for business property placed in service during the year—you can reduce both federal and state income tax.
2. Self-Employment Tax: This is the equivalent of the Social Security and Medicare tax levied on regular employees. An employer is normally responsible for its share of these taxes, so you effectively must pay twice as much tax as an employee does. For 2019, the self-employment tax rate is 15.3 percent on the first $132,900 of income and 2.9 percent on income above that threshold. Tax relief: At least you deduct half of the self-employment tax on your annual tax return.
3. Other Payroll Taxes: If you employ other workers, as many self-employed individuals do (see above), you must pay half of their Social Security and Medicare taxes, plus unemployment tax and, in some cases, temporary disability tax, to the proper authorities. In addition, you’re responsible for withholding the requisite payroll taxes and depositing those amounts with the IRS. Even worse, if you don’t meet these obligations, you could be hit with the “trust fund penalty” (TFP). With the TFP, you’re held personally liable for underpayments due to willful failure. Sage advice: Have clients pay the IRS before other creditors to avoid a disaster.
4. Sales Taxes: These taxes have sparked controversy for online sellers. Because states generally impose their own state sales taxes, at the very least, you must observe the laws for the state of your tax home. But you were also responsible for collecting sales tax from buyers in a state where your business maintains a physical presence “nexus.” Thus, you may be required to register in certain states and pay the applicable tax. Note that the rules vary from state to state.
However, the U.S. Supreme Court’s decision in the landmark 2018 Wayfair case effectively overruled the physical presence requirement for online sellers. States now have right to require tax collection from remote sellers that don’t have a physical presence in their states. More states are expected to jump on the bandwagon as this area of the law continues to evolve.
Keep an eye out for the latest tax developments affecting self-employed taxpayers. Don’t hesitate to contact your professional tax advisors for assistance.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...