Three steps to take advantage of the 20% pass-through deduction in the “tax cuts and jobs act of 2017”
The new tax deduction for owners of pass-through entities in the Tax Cuts and Jobs Act of 2017 has brought increased focus on the issue whether a worker is an “employee” (W-2 recipient) or an “independent contractor” (1099 recipient). Given the choice, employers may prefer 1099 reporting to avoid payroll costs and withholding of social security, Medicare, unemployment and income taxes. Meanwhile, many wage earners would want to be paid as independent contractors, if their pay could be deemed “qualified business income,” entitling them to as much as a 20% deduction.
Here are three preliminary consideration:
1. Before organizing an LLC or other pass-through entity, the Employer and the worker must analyze the nature of their relationship to determine if it will be recognized by the Internal Revenue Service as an independent contractor relationship. Review the IRS 20-Point Checklist for Independent Contractors to find out.
2. If the requirements are met, the next step is to ask your tax advisor whether the funds that will be reported by the employer on the 1099 are “qualified business income” under the Tax Cuts and Jobs Act of 2017.
3. If the 1099 payments are “qualified income” click here to organize your LLC online—expertly, rapidly and at low cost. Alternatively, speak to a service representative at 800 999-0850 (if you reside in New York State), or call 800 221-2972 (press 2) for all other states or U.S. territories.
Since the passage of the Tax Cuts and Jobs Act of 2017, we have received calls from people adjusting to the new relationship between employer and employee. One example is a New York subcontractor who had been working as an offsite employee for several years. His employer asked him to form an LLC in order to continue working for the company. Blumberg prepared the necessary documents and filed them with the New York Secretary of State, manufactured an LLC kit with Operating Agreements (in fillable pdf) and a company seal. The subcontractor then opened a bank account for the LLC and continued working.
Sidney Kess, CPA-Attorney, is of Counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company