How Will The Tax Reform Affect W-2 and 1099 Tax Filings?

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  • When filing taxes this year, W-2 employees are expected to receive tax cuts based on their adjusted income bracket and higher standard deductions
  • This year, qualifying independent contractors will benefit from the newly placed 20% “pass-through” tax deduction for business owners

The Tax Cuts and Jobs (TCJA) which was passed by the U.S. Congress in 2017 will take effect in this season’s tax filing. Here are some expected changes that workers who identify as W-2 employees or 1099 independent contractors can expect:

W-2 EMPLOYEES

  • Income bracket and tax rates have changed

According to The Motley Fool, a finance and investment news site, the TCJA law lowered the U.S. tax rates but also increased the income thresholds per bracket. What this means to the average taxpayer is that they will see a decrease in taxes withheld in their paychecks per pay period.

These rates are expected to stay the same up until 2025, but the income thresholds per bracket may change to account for future inflation, which will also increase tax rates over time.

  • Standard deductions have increased – But personal exemptions are eliminated

With TCJA passing, individuals and married couples’ standard deductions have doubled but personal exemptions can no longer be claimed.

Image Credit: The Motley Fool

Finance Author Dave Ramsey said in regards to these new deduction, “In many cases, the increase in the standard deduction will make up for the elimination of personal exemptions, leaving some Americans with more money in their pockets.”

  • A low limit of SALT deductions for Californians (and other high-tax states)

The new tax law limits the total deductible of state and local taxes (or more commonly known as SALT taxes) down to $10,000. This could be a drawback for employees living in high-tax states, such as California, since they won’t be able to claim property, sales and state income taxes beyond the $10,000 limit as deductibles. In theory, having a lower tax rate and higher standard deduction can offset the possible effect of a lower SALT deduction.

  • Obamacare individual mandate is still in effect

The individual mandate for the Affordable Care Act (ACA) was repealed through the TCJA. Though the tax cuts take effect in this year’s filings, the repeal of the ACA won’t take effect until next year’s filing. Individual filers still need to present proof of health care coverage to avoid paying the mandate penalty.

1099 Independent Contractors

For independent contractors who identify themselves as sole business proprietors or identifies as an S-Corp or LLC, the biggest change that will affect their tax filings is the TCJA’s 20% “pass-through” tax deductions.

What this means is qualifying workers can deduct up to 20% of their net business income from their income taxes, reducing their effective income tax rate by 20%. The pass-through deduction can help alleviate the tax burdens that are obligatory for independent contractors which can be an equivalent of up to 53% of their income.

However, per the Internal Revenue Service (IRS), “Independent contractors with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for single filing, the pass-through deduction is subject to limitations such as the type of trade or business, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.”

The IRS is encouraging taxpayers to do a “paycheck checkup” on a regular basis. The agency is offering several resources for taxpayers to properly understand the changes that took place with the TCJA including a free webinar and an online “Withholding Calculator” so individuals can understand how much they taxes they should be withholding from their paychecks. For independent contractors, the IRS has provided a list of business tax credits and deductions that have been changed at the implementation of the TCJA.

Being well versed on the changes made with the new tax law can help you take home more of your income. To find out how else the TCJA can affect your tax filings, visit the Tax Reform section of the IRS website: https://www.irs.gov/tax-reform.

For current SoloPoint contract workers… If you need assistance in receiving copies of your 2018 W-2 or 1099 forms, contact our helpful office administrators at accounting@solopointsolutions.com or call us at (408) 246-5945.

 

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