Independent contract workers get tax cut under new law
The new tax law delivers a massive tax cut for corporations. Republicans sold the plan in part with the argument — heavily disputed by critics — that lower business taxes would trickle down through higher wages and be a boon to the middle class.
But the law offers a more direct benefit to one seemingly growing segment of the workforce: independent contract workers.
Information technology consultants in Silicon Valley stand to benefit, as do freelance Hollywood visual effects artists. Many so-called gig workers who accept individual jobs through an app — such as Uber or Lyft drivers or TaskRabbit freelance laborers — will also see tax rates fall.
“Every Uber driver, as far as I can see, gets a benefit,” said Edward Kleinbard, a USC professor and former chief of staff to Congress’ Joint Committee on Taxation.
Whether it’s beneficial in the long run to be an independent contractor, rather than an employee, will still be hotly debated. The tax changes do nothing to address other criticism of so-called contingent work, such as its low pay, uncertain scheduling and lack of healthcare, retirement or other benefits.
But the new tax law lets “independent” workers deduct 20 percent of their income before paying the new, lower individual tax rates signed into law by President Trump.
That’s the same deduction received by other pass-through businesses, which, unlike corporations, pay taxes through the individual code. That category accounts for the majority of American businesses, including most independent contractors.
A single Uber driver with a net income of $40,000 a year who takes the 20 percent income deduction and the standard personal deduction would save $960 in federal income taxes compared with an employee with the same income, according to DeDe Jones, a certified public accountant and managing director of Innovative Financial in Colorado.
The exact number of independent contractors who stand to benefit is unknown and the law places restrictions on who can take the full deduction. For example, there are limits for taxpayers making more than $157,500 if they file individually or $315,000 as a couple.
But many contractors, especially gig workers, make less than that. And experts say some of the limits — such as what types of businesses will face stricter caps — are susceptible to evasion.
Americans, in surveys from the Bureau of Labor Statistics, report lower rates of self-employment than in previous decades. But other data show a rise in independent contracting.
Lawrence Katz of Harvard University said many contractors report themselves as employees in the BLS survey. A study he did with Alan Krueger of Princeton University found that 8.4 percent of workers in 2015 were working as independent contractors, up from 6.9 percent in 2005.
Internal Revenue Service data also back up the conclusion, showing a rising share of people who are independent contractors and have no W-2 income, Katz said.