How the Build Back Better Act could affect freelancers

The proposed $3.5 trillion legislation package called the “Build Back Better Act” is currently being debated and will likely be changed before any new tax laws go into effect, but it’s important for self-employed business owners and freelancers to keep an eye on it as there are some major tax changes in it, which my impact you.

Here are some of the most relevant potential tax changes and how they could impact you and your business:

If the bill passes, one of the most significant changes that would be effective immediately is an increase in the top capital gains rate – increasing from 20% to 25%. This applies to all sales on or after September 13, 2021.

There are other changes effective after 2022:

· The top C-corporation tax rate rises to 26.5% for taxable income over $5 million; 18% for the first 400,000 and 21% thereafter until the $5 million threshold.

· The top individual tax rate increases to 39.6% for taxable income over $450k for married filing jointly (MFJ) and $400k for single filers.

· The net investment income tax on trade/business income  would be 3.8% this tax is charged on K-1 trade/business income if taxable income is over $500,000 for MFJ and $400,000 for single filers.

· An additional 3% surtax on incomes over $5 million for MFJ and $2.5 million for single filers.

· Back door Roth IRA contributions would be eliminated.  This approach involves taking a traditional IRA or 401 (k) accounts and converting it to a Roth IRA. This is currently a legal way to get around the income limits that normally restrict high earners from contributing to Roth IRAs (contributions are eliminated for those in the top income tax bracket).

· Perhaps growing your freelance business to is on your long-term goal list. If so, and you make it into the top income tax bracket, you would no longer be able to contribute to a retirement account if your retirement account balances are over $10M.

Some other key objectives of the proposed Build Back Better Act include:

· Expanding access to capital, particularly for businesses owned by women, minorities, and immigrants.

· If you are a freelancer who focuses on government contracts, there are proposed changes included in the Act that will increase access to federal contracts and also provide new financing and technical assistance programs to help level the playing field in these areas.

· There may be a cut in taxes for small business owners with children. The administration is looking to extend the Child Tax Credit included in The American Rescue Plan (ARP) increased the Child Tax Credit from $2,000 per child to $3,000 per child for children over age six and $3,600 for children under age six. Research from the Treasury Department estimates that more than 3 million small business owners with children will benefit from these tax cuts.

· Freelancers and small business owners who buy health insurance through the  HealthCare.gov exchanges may benefit from a continuation of the American Rescue Plan tax credits that lowered health insurance premiums for those buying coverage through the Affordable Care Act.

· The proposed bill would also guarantee 12 weeks of paid parental, family, and personal illness/safe leave by year 10 of the program and ensure workers get three days of bereavement leave per year. The funds for wage replacement would be provided by the federal government, not the employer.

Modifications to any proposed tax changes are likely to happen as part of negotiations to get the bill passed and signed into law. Watch for further information to become available in the next several weeks. We will keep freelancers informed as more details develop.

Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting and business articles for freelancers on his website, http://www.cpaforfreelancers.com, which also features a free newsletter, blog and a comprehensive freelance tax guide.