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New Tax Benefits to Filing as a Small-Business Owner

New Tax Benefits to Filing as a Small-Business Owner
(Maria Dryfhout/Dreamstime)

By    |   Tuesday, 10 April 2018 01:39 PM

If you have not been living under a rock, you would know that there have been major changes in the tax code that will have an effect on how much you owe to the IRS.

I once had an agent tell me, “Mario, it’s not how much you make, it’s how much money you keep.” We have been hearing about the tax savings over and over again. One question that keeps coming up is whether under the new tax law it’s better to be a W-2 employee instead of a 1099 independent contractor. The reason this question arises is due to the new small business-friendly deduction for qualified business income. 

Over the years when this question surfaced, most analyses compared the W-2 employee to a sole proprietor independent contractor. Given that sole proprietors were subject to self-employment tax on all their business income and W-2 employees split the tax 50/50 with their employers, the indication was that it was better to be an employee.

“That was always a mistake, and assumes that independent contractors were basically an employee,” says Guillermo A. Birmingham, CPA, owner of DC Metro Tax Planning Services of Alexandria, Va.

A savvy business owner working with a forward-looking tax strategist has the ability to lower their tax bill in ways that an employee can only dream about.  For instance, business owners have the ability to elect how they will be taxed. They can elect to be taxed as a sole proprietor, S corporation, C corporation or a partnership.

Birmingham provides an example: “Imagine you are a small business owner with a net income of $80,000.  You can remain a sole proprietor and pay $11,305 in self-employment tax or elect S-corporation status, pay yourself reasonable salary of $40,000 and take the remaining $40,000 as a distribution and lower your self-employment tax to $5,652, or a savings of half of your taxes.” 

However, even if you want to use the lazy man’s analysis to argue that being a W-2 employee is better than an independent contractor, think again. There’s a new sheriff in town called Section 199A. It’s the biggest gift in the tax law for owners of a pass-through entity (sole proprietors, S corporations, partnerships). 

What’s so good about it?  Many believe Congress got shamed into adding this provision to the new law because of the tax break being given to the large corporations. 

Essentially, here’s how it works in a simplified example:

Joe owns a bakery. He works all year, and at year’s end he produces a net profit of $100,000. Joe is single and has no other income. Under this scenario, Joe would be able to take a $20,000 qualified business income deduction. The net effect on his tax bill would depend on Joe’s tax bracket. If Joes ends up at the new top tax rate of 37 percent, his tax bill savings would be $7,400.  Now that should make you pause and ask yourself, “Why am I working for someone else, again?” 

Here are the general limits and rules of Section 199A:

  1. Taxable Income must be $315,000 for joint filers and $157,500 for all others;
  2. There is a phase-out level, which is $415,000 for joint filers and $207,500 for all others;
  3. The deduction is at the personal level and not at the business level, so it’s reported on your Form 1040, Individual Income Tax Return. 

According to Birmingham, it’s important that small business owners seek the guidance of a tax strategist to plan to proactively take advantage of this new deduction to the full extent possible.

Mario Henry, a former National Football League player, is a financial services professional with 18 years of experience in the industry and author of "How to Hire Your House," an innovative guide on how to create a tax-free pension and sustain sufficient income through retirement. Mario also is a licensed insurance broker and a national motivational speaker. He was a wide receiver with the NFL’s New England Patriots and a scholarship football player at Rutgers University.

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A savvy business owner working with a forward-looking tax strategist has the ability to lower their tax bill in ways that an employee can only dream about. 
tax, benefits, filing, small, business, owner
Tuesday, 10 April 2018 01:39 PM
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