Under new tax bill, are sole proprietors and single member LLCs providing services treated the same as pass-throughs with the 20% discount?

[TaxGuyBill · Accepted solution]

Yes.

That will start in 2018 (tax returns filed early in 2019).  The 20% reduction only affects Income tax, not Self Employment tax.

If your "taxable income" on your tax return is over $157,500 (Single) or $315,000 (Married Filing Jointly), there are further restrictions that may lower or eliminate the 20% reduction.

[jrgriggs1]

Where on Turbo Tax do we get the 20% reduction?

[Michael_C]

So, does that mean you get the 20% deduction for business and then you still get the $24k married personal deduction on the "profit" as well?  In other words if I net $100k in a year I'd only pay personal taxes on $80k and then the $24k standard deduction would come out of that effectively taxing me on only $56k in a year?  Is that how this works?

My apologies, just starting to understand this whole thing as I am working as a consultant currently.

[VolvoGirl]

I think so.  The 24,000 Standard Deduction comes off your AGI before the regular income tax is calculated.  But you also owe the Self Employment tax on the Net Profit on Schedule C.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment. You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400. The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. So you get social security credit for it when you retire.

[Michael_C]

Thanks for the reply.  I'm assuming if you're working as a consultant as well as an employee, you don't get to just add all your income together and get that 20% taken off anything other than the income generated as self-employed.  Is that correct?  In other words, this year I have more expenses setting up my business than I do income.  I'd assume that 20% would be completely nullified and not applied to my overall income, correct?

[VolvoGirl]

Yes.  Only on the Net Profit on schedule C.  Last year my husband had a loss so he didn't get the 20%.  

Do you need some self employment info?

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax. You will need to use the Online Self Employed version or any Desktop program but the Desktop Home & Business version will have the most help.

You might want to use Quicken or QuickBooks to keep tract of your income and expenses. There is one called QBSE QuickBooks Self Employed that works with Online Turbo Tax and will give you a free online tax return next year.
http://quickbooks.intuit.com/self-employed

You need to report all your income even if you don't get a 1099Misc. You use your own records. You are considered self employed and have to fill out a schedule C for business income. You use your own name, address and ssn or business name and EIN if you have one. You should say you use the Cash Accounting Method and all income is At Risk.

After it asks if you received any 1099Misc it will ask if you had any income not reported on a 1099Misc. You should be keeping your own records. Just go through the interview and answer the questions. Then you will enter your expenses.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment. You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400. The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. So you get social security credit for it when you retire. You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 27 (goes to 1040 line 7). The SE tax is already included in your tax due or reduced your refund. It is on the 1040 Schedule 4 line 57 (goes to 1040 line 14). The SE tax is in addition to your regular income tax on the net profit.

Here is some IRS reading material……

IRS information on Self Employment
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Publication 334, Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf

[Anonymous]

think of LLC's and sole propreitorships as category 1. first the net schedule c income must be reduced by related expenses such as 1/2 the self-employment tax,  pension/401k,   self-employed health insurance and any other directly related expenses.   the 20% is applied to the net.    also qualifying as a separate category,  for the 20% are certain REIT dividends and income from Publicly Traded Partnerships

income from partnerships and S-Corps also qualify for the 20% and they are lumped in with LLCs and sole proprietorships as category 1 type items. they too mus be reduced by related expenses 

for each category losses are netted against income.

so $100,000 net schedule C income would be offset by $100,000 S-Corp loss resulting in a net of $0 income qualifying for the 20%

there is also a limit if your business is a specified service trade or business

as defined in the iRS regs

For taxpayers with taxable income above the phase-in range, an SSTB is not
a qualified trade or business. Section 199A, through reference to section 1202, defines
an SSTB as a trade or business involving the performance of services in the fields of
health, law, accounting, actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or any trade or business where the principal asset of such
trade or business is the reputation or skill of one or more of its employees or owners.
The trade or business of the performance of services that consist of investing and
investment management, trading, or dealing in securities (as defined in section
475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)) is also
defined as an SSTB for purposes of section 199A. Further, section 199A looks to the
trade or business of performing services involving one or more of the listed fields, and
not the performance of services themselves in determining whether a trade or business
is an SSTB. The designation of a trade or business as an SSTB applies to owners of
the trade or business, regardless of whether the owner is passive or participated in any
specified service activity. Accordingly, it is both necessary and consistent with the
statute and the legislative history to expand the definitions of the fields of services listed
in section 199A(d)(1) and (2) and §1.199A-5 beyond those provided

employee compensation doesn't qualify for the 20% 

TT handles the 20% thru a section in the input 

since you say you are engaged in consulting, this would appear to be  a SSTB and thus you would be subject to limitations if your taxable income was above $160,700 for 2019     for single person it would go away completely if taxable income was $210,700 (if married  $421,400)

since you say you'll have a loss for 2019, here's some bad news.  under the law,  this QBI loss must be carried forward for purposes of computing next year's  QBI deduction.     so if the QBI loss for 2019 is $10,000 and the year after you have a $20,000 QBI profit,  only $10,000 would qualify for the QBI deduction and again since you are IN a SSTB you would be subject to the income limitations in 2020