There are a few big tax changes in 2018 for self-employed individual and small businesses with the passage of the Tax Cuts & Jobs Act , and here at Everlance we wanted to make sure we addressed them so you can be ready when it comes time to do taxes this year.
After all, self-employed individuals and micro-businesses (10 or fewer employees) make up 76% of all small businesses and the bulk of Everlance customers!
Self-Employed Tax Change Highlights
- Lowered individual tax brackets
- 20% Deduction
- $1m Equipment Deduction
- Simplified Filing
Lowered Individual Tax Brackets
Let’s kick this off with a general, but very important change – lowered tax brackets for individuals. While the 7 bracket structure was ultimately retained, the general percentages have been lowered for most brackets.
| Marginal Tax Rate | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
|---|---|---|---|---|
| 10% | $0 - $9,525 | $0 - $19,050 | $0 - $13,600 | $0 - $9,525 |
| 12% | $9,525 - $38,700 | $19,050 - $77,400 | $13,600 - $51,850 | $9,525 - $38,700 |
| 22% | $38,700 - $93,700 | $77,400 - $156,150 | $51,850 - $133,850 | $38,700 - $78,075 |
| 24% | $93,700 - $195,450 | $156,150 - $237,950 | $133,850 - $216,700 | $78,075 - $118,975 |
| 32% | $195,450 - $424,950 | $237,950 - $424,950 | $216,700 - $424,950 | $118,975 - $212,475 |
| 35% | $424,950 - $426,700 | $424,950 - $480,450 | $424,950 - $453,350 | $212,475 - $240,025 |
| 37% | Over $426,700 | Over $480,450 | Over $453,350 | Over $240,025 |
20% Deduction
This is the real winner. Self-employed people like you are going to be able to take 20% of your gross income right off the top! How does this play out? Here’s an example.
Self-Employed Company X
Taxable Income:$100,000
2017 Rules:Claim $100,000
2018 Rules: Claim $80,000
In this instance that’s a savings of $20,000!
The government is hoping that this 20% savings is going to go back into small businesses, creating more jobs, bonuses, pay hikes which ultimately provides more taxable revenue (as a result of more people having jobs). It’s a win-win for now.
For those of you that are self-employed that own a service-based business, such as consulting, legal, tax prep, .etc – be aware that there is a limit to this 20% deduction based on filing either single, or married/jointly.
Service-Based Business Threshold (Single): $157,500
Service-Based Business Threshold (Married/Joint): $315,000
This ceiling was created to curb potential abuse, so it’s a great thing to have in place, you just need to be aware of it.
$1m Equipment Deduction
While the higher limits on this deduction may not apply to most self-employed individuals, you can now take an extra $500,000 in deductions on purchases of equipment. There are obvious restrictions, but for the most part you’ll get double the deduction if you qualify.
The phase-out deduction has been increased to $2,500,000 from $2,030,000 in 2017.
Doubled Standard Deduction
In 2017 you were allowed to take a $6,500 deduction, and now in 2018 that number nearly doubles to $12,000 for a single filer.
What does this mean? This means that instead of that time-consuming itemizing you would normally do for expenses over the standard deduction ($6,500) you now have an extra $5,500 you can add without itemization. That’s $5.5k less itemizing!
Here’s the complete breakdown of deductions by filing status.
| Filing Status | Previous Deduction | 2018 Deduction |
|---|---|---|
| Single | $6,500 | $12,000 |
| Married Filing Jointly | $13,000 | $24,000 |
| Married Filing Separately | $6,500 | $12,000 |
| Head Of Household | $9,350 | $18,000 |
Simplified Filing
What does this mean? Well, for the average self-employed individual it could mean a savings of 100+ hours. The average amount of time spent dealing with taxes is estimated at over 160 hours, and thanks to a few new tweaks to the code – filing taxes should get a little bit easier for you.
The standard deduction increase was aimed squarely at reducing time itemizing and ultimately, it should shave off a bunch of time you spend every year filing taxes.
Self-Employed Mileage Tracker
Don’t forget that one of the best ways to save on taxes as a self-employed individual, freelancer or small business is to maximize your deductions.
Everlance does a seamless job of automatically tracking your company mileage, adding your expenses and even revenue (if you have it) to create a complete picture of your self-employed finances.
When it’s tax time, simply export your data and import it into your favorite tax software (like TaxAct) or give it to a tax preparer.
It’s really that easy!
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