Everyone is talking about the new tax overhaul that is taking place under the new administration. There are so many changes that many are finding it hard to figure out what the implications are for them. Major corporations and large businesses employ complete staffs to deal with all the tax laws and to find ways of minimizing their exposure as much as possible. It’s a different story for the small business owner and the independent contractor or sole proprietor. But there may be some good news hidden in all the mix.
The recent tax changes enacted by the Trump administration may have a big impact on how you opt to pay yourself as a self-employed worker or freelancer. It can also influence whether you decide to incorporate your business.
For large corporation the tax reform will drop the top rate for federal corporate taxes. It’s clear that this is a win for the major corporations. The Republican theory has always been that letting big business keep more of their profits will filter back into the economy in the form of more jobs and pay increases. Only time will tell if it all works out like that.
For the freelancers and self-employed it’s the pass-through that is of main importance. How pass- through income is dealt with in the new tax plan may help some find an edge.
The Trump tax plan sets the top rate of 35 percent on personal income. However, owners of partnerships, S-corps and LLCs could benefit from the much lower 25 percent rate on pass-through business income.
Basically, the pass-through rate applies to any income remaining after you have paid yourself a reasonable salary. So, theoretically speaking, you could pay yourself a fraction of your total net profit and be taxed on that at the higher 35 percent rate, while the larger amount of the profit gets taxed at the lower 25 percent rate. It could lead to huge savings.
If you want to find out where you stand, consult with a professional.