Staying Fit
Even through the COVID-19 pandemic has ended, more than 99 million additional people are working part time in the gig economy. If you’re self-employed, you know you have good months and bad months, and no benefits, either. The tax breaks for the self-employed can help soothe some of that pain — but taxes can also sting you if you’re not prepared. Here’s how to manage your taxes if you’re suddenly self-employed.
A big break for the self-employed
Under the 2017 Tax Cuts and Jobs Act, self-employed individuals can deduct 20 percent of their qualified business income (QBI) from their federal income taxes. If you generated $45,000 in income from your business and had $10,000 in deductions, your QBI would be $35,000. You can then deduct 20 percent of that, or $7,000, from your income, which will reduce the amount of tax you owe.
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You don’t have to form a special type of business to get the self-employment deduction. If you’re a sole proprietorship — as many self-employed people are — you’re entitled to the tax break. Other fine print:
- The break reduces only federal income tax, not the self-employment tax.
- The deduction is phased out for joint filers with more than $364,200 in personal income, and above $182,100 for all other filing statuses. You get no deduction if your personal income is above those ranges.
- The deduction is limited for individuals in some traditionally high-paying service businesses, such as lawyers and doctors.
“It’s a phenomenal deduction, and most businesses qualify,” says Mackey McNeill, a certified public accountant in Bellevue, Kentucky. “You may be able to generate income this year and pay almost no income tax on it at all.”