With the recent passage of a tax overhaul plan, independent contractors and businesses will soon reap the rewards.
The new plan – released by Republican congressional leadership – nearly doubles the standard deduction for single
In conference committee, GOP leaders cut the top people – to $12,000 – and increases the standard deduction for couples to $24,000, according to an analysis by Politirate for households making more than $600,000 and individuals earning more than $500,000 to 37 percent from the current 39.6 percent. From there, there will be six other tax brackets of 10, 12, 22, 24, 32 and 35 percent. A large part of the individual provisions will expire in 2025 unless Congress votes to extend them.
Where the real benefit comes is if you are an independent contractor.
Let’s look at the math:
If you are a robot programmer making $30 per hour and you work 2,400 hours per year, you can expect to make approximately $76,400 – factoring in overtime at $45 per hour and double time at $60 per hour.
Not bad right? Here’s the kicker, your tax rate is going to be around 24 percent to 35 percent depending on your household income.
Now, let’s examine if you are an independent contractor:
You are the same robot programmer, but your hourly rate is now $65 per hour because the employer isn’t paying for health insurance. So, using that and working 2,400 hours per year, you make $161,000 per year – factoring in overtime at $84.50 per hour and double time at $110.05 per hour.
Of course, the expectation is that you earn a higher hourly wage, you make more money, right? Well, the other thing is the tax rate. As an independent contractor/business, your tax rate would be around 21%, much lower than that of an individual.
Here’s what David Hyrick, a tax lawyer, said about the benefits of being an independent contractor under the House version of the tax plan:
“If you are the owner of an LLC that makes $300,000 per year you could choose to pay yourself a salary of $100,000. That salary would be taxed at your normal rate. As normal, you would pay Social Security taxes, Medicare and unemployment taxes on that income. However, the remaining $200,000 of profit would be taxed at 25 percent, with no additional employment taxes. If you’re in the 35 percent tax bracket, following this method would allow you to lower your tax bill.”
Now, there is the cost of health insurance. You will have it deducted as an employee, which would come out of the $76,400 we figured earlier. As an independent contractor, you are kind of on your own.
Consider this: According to eHealth, the average monthly cost of health insurance for a family plan is about $833 per month, or $9,996 per year. So, even by taking care of your health insurance yourself, you are still making more as an independent contractor and taxed at a lower rate.
But, the important thing is to make sure to talk to a tax professional or an accountant before making any big decisions related to the new tax plan.