The gig economy is booming. Freelancers and independent contractors are rapidly gaining ground in the workforce. In 2015 there were 3.2 million Americans worked in the gig economy. Some research projects that this category of workers will make up 43 percent of the country’s workforce by 2020.
The Tax Cuts and Jobs Act–which was passed into law at the end of last year–offers attractive tax breaks for this group of workers.
What is the gig economy?
The American economy has gone through a lot of changes over its last decade of recovery from the 2008 financial crisis. As unemployment has gradually reduced, we’ve seen an increase in companies opting to hire short-term contractors–in lieu of permanent employees–as well as a parallel surge in workforce members available for such jobs. This pool of temporary jobs and workers are collectively known as the gig economy.
Workers in the gig economy are self employed. They do not receive the same benefits as employees (e.g., health insurance, paid time off), nor do they have an employer who automatically deducts a portion of their income for Social Security and Medicare taxes.
What is the tax break?
The new tax law offers a significant advantage for the self-employed. Individuals earning under $157,500 (and twice that number for couples filing jointly) can deduct 20 percent of their annual income before filing taxes on it. This savings is considerable, especially because workers in this group typically owe more taxes than employees in order to compensate for their lack of withholdings.
The new tax break makes a job in the gig economy more appealing than ever. Labor experts speculate that this incentive could prompt even more workers to give up their employee status and shift instead to contract work.