With all of this talk about the new tax bill, who will truly benefit? The bill reduces the amount we will pay in taxes and will give the most benefit to entrepreneurs. This includes small and local businesses as well as large corporations.
There are some changes to the way independent contractors pay taxes.
This is important for workers to understand, especially for network marketers. Should you consider your filing status? Or should you establish a legal business entity for the tax savings?
Before the bill is finalized, be prepared and know how to file your taxes. Here’s a guide to network marketers taxes for the 2018 tax bill.
Your Tax Filing
Before beginning, let’s explain your tax filing.
Most network marketers are sole proprietors, meaning you run a single-owned business with no employees. This term doesn’t require a legal classification, and you’ll only pay taxes if you earn a certain amount.
So if you earned more than $600 for a tax year, you’ll receive a 1099-MISC form. This form is used to report your income to the IRS.
When you earn money as an independent contractor, you’ll have to pay taxes every quarter. If you have a professional tax preparer or accountant, you probably know the drill.
If you’re new to network marketers taxes, seeking a professional will be expensive but it prevents you from making any errors.
The great thing about being an independent contractor is filing deductions. These are expenses that you spent while doing your job; your home, computer, car, and any necessary software and equipment can be deducted.
What Will Change with the Tax Bill
Now we have the independent contractor filing status explained, let’s see how the network marketers taxes will change.
Since your taxed at your own individual rate, you’ll still be taxed based on your income.
The amount of taxes you have to pay depends on how much you make; there is a variety of tax brackets and you’ll fall under one, depending on how much you make.
The highest you can be capped is 39.6%. But you have to make over $400,000 as a single individual to be taxed that much.
One of the latest developments under the tax bill is your employer withholding 5% of your income for federal taxes. That’s less than the taxed amount you’ll owe, so you’ll still have to file and pay the rest of the portion owed.
Are There Additional Options?
One of the ways independent contractors are combating this bill — and the 5% tax hold — is by establishing themselves as a business entity.
It’s no secret the ones who benefit most from the tax bill are businesses, and this includes small businesses.
But the IRS can’t tell the difference between you working out of your home and the mini-mart down the street, as long as you both file the same.
There are a couple of options you have when filing. The best method is establishing a ‘pass-through’ business. The income earned from these businesses is ‘passed through’ to the owners, who file those taxes under the individual tax.
Another reason why you’ll benefit from earning income under a business entity is a smaller tax bracket.
For an individual, the tax caps at 39.6%. For businesses, including pass-throughs such as S corporations and limited liability companies (LLC), their tax bracket caps at 25%.
Now, this tax bracket difference won’t have a significant impact unless you make about six figures. These top earners are a small portion of network marketers.
However, pass-through businesses have lower taxes. Pass-throughs have a 20% tax deduction, which is huge.
Even if you decide to not become a business entity, you’ll still gain tax deduction benefits as an individual.
Tax deductions won’t be as low for individuals and you can no longer claim personal exemptions. This could impact every network marketers taxes differently.
Filing Taxes and Claiming Deductions
There are changes when taking standard deductions. This includes individuals who are single and married couples who file jointly or separately. Rather than itemizing deductions, most will take standard deductions and save more.
For individuals and married couples, your standard deduction will increase but you can’t take any personal exemptions. The child tax credit also increases, which benefits network marketers taxes if they’re parents.
Since you’re a 1099-MISC or own a pass-through business, you’re responsible for your own health insurance.
In 2019, you’ll be able to discontinue health insurance without paying a fine, or you can continue paying for health insurance but have premiums increase by 10%.
Change in Write-Offs
We now live in a ‘gig economy’ which is a term describing the high amount of temporary, freelance, part-time, and contract jobs available.
Workers who fall in the gig economy usually file as a 1099-MISC. They can take write-offs on any expenses needed for their job.
One of the major write-offs you can take is on a business vehicle: the tax bill states you can take $10,000 write off on a vehicle, as long as it’s in its first year of use.
What does that mean for network marketers taxes? If you drive to your clients’ houses, you can take write-offs on your vehicle expenses, such as oil changes and gas. If your car is in its first year of use, your write-offs cap at $10,000.
Are You Ready to File Your Network Marketers Taxes?
The new tax bill is bringing a lot of changes to our taxes. This definitely affects network marketers, who file as either a 1099-MISC or pass-through business entity.
These changes include anywhere from your tax deductions to your health insurance.
If you decide to file as a contractor, you shouldn’t have much to worry about. If you want to establish a business entity, make sure you receive the tax saving benefits.
For the most part, individuals and businesses can save a lot on their taxes. Just be educated before the 2018 tax season.
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