Freelancers Punished In New IRS Rule Under COVID Stimulus

(Sovereign Man) A few hundred pages into the latest $1.9 trillion Covid relief law, the “American Rescue Plan Act of 2021,” you’ll find Section 9674, It says that a “third party settlement organization” does not have to report to the Internal Revenue Service (IRS) any payments to contract workers under $600.

These third parties include Uber, Airbnb, Etsy, eBay, Freelancer, and other platforms which facilitate payments to gig workers. The problem is that this little amendment lowers the reporting threshold from $20,000 to $600. Previously, a gig worker could earn up to $20,000 on these platforms without the IRS being informed of their income.

What this means:

From this rule change the IRS expects to collect an additional $1 billion annually, presumably from the poorest gig workers who previously earned under $20,000 per year. These low earners previously flew under the radar.

But now they could be met with surprise bills from the tax man when it comes time to file. And as many of these contractors are living paycheck to paycheck, they may incur additional IRS penalties if they are unable to pay what the IRS says they owe.

Of course, the same politicians who snuck this into the bill are the ones who declared over and over that their tax policies would only affect millionaires and the ultra wealthy. But now, one of the first things they do is shake down the lowest tax bracket.

We hope these gig workers enjoy their stimulus checks. They are soon going to learn that nothing is free when it comes to the government. There are always strings attached.

What you can do about it:

The good news is that freelancers, gig workers, self-employed individuals, and contractors have a number of tools at their disposal to legally minimize their tax bill.

Solo 401(k)

Solo 401(k)s are retirement accounts for business owners and contractors with no full-time employees – only you, part-time and contract labor (those filing an IRS 1099, which signals that they are NOT employees). For the self-employed and those with side hustles, the structure, flexibility, investment options, and annual contribution limits make a Solo 401(k) a potential go-to retirement option.

In 2021, Solo 401(k) owners can put away $58,000 tax free each year. If you’re 50 or older, that amount goes up to $64,500. The taxes on this income will be paid when you are retired and collect the money, presumably in a lower tax bracket. A Solo 401(k) allows you to take out a loan against your balance, and invest in more asset categories like precious metals, international real estate, and cryptocurrency.

Plus there are no reporting requirements until the account reaches $250,000. Click here to read a September 2018 Monthly Letter on Solo 401(k)’s (although certain numbers may be out of date, the general information is still accurate).

Foreign Earned Income Exclusion

The US is one of only two countries in the world that taxes its citizens no matter where they live. (The other country is Eritrea in east Africa, but they don’t have the resources to enforce their tax policy. So that leaves the US as the sole global enforcer of citizenship-based taxation.)

But, by moving overseas, US citizens can take advantage of the Foreign Earned Income Exclusion (FEIE), a special provision in the US tax code that allows US citizens living abroad who file Form 2555 along with their tax return to earn up to $108,700 per year (and growing) tax-free.

“Earned income” means that investment income and dividends do not apply for the exclusion. But self-employed, freelancers, and digital nomads can absolutely take advantage of the rule.

You can even use the Housing Deduction or Exclusion to save even more.

Puerto Rico Act 60, Chapter 3 (previously Act 20) Tax Incentive

Contract workers, freelancers, consultants, and the self-employed can also reduce their tax burden significantly by moving to Puerto Rico and establishing a corporation. This used to be called the Act 20 Export Services Act, now reorganized under Chapter 3 of Act 60. If your company provides services to clients outside of Puerto Rico, the corporate tax rate is just 4% and dividends to the owner are tax free.  You will still have to pay yourself a reasonable salary, subject to federal payroll taxes and Puerto Rico’s income tax. However what is considered “reasonable” in Puerto Rico is often much lower than the mainland.

Since Puerto Rico is a US territory and can set its own tax policies, it’s one of the only options for US citizens to legally escape most federal taxation.

Of course this probably won’t help many Uber drivers and Airbnb hosts. But a broad swath of services do work, for example:

  • Research and development
  • Advertising and public relations
  • Any kind of consulting (economic, scientific, environmental, technological, managerial, marketing, human resources, computer, auditing…)
  • Creative industries (design, art, architecture, creative education, etc.)
  • Commercial art and graphics services
  • Professional services (legal, tax, accounting…)
  • Data processing centers
  • Computer programming
  • Blockchain-related businesses
  • Remote medical services (telemedicine)
  • Educational and training services

Just keep in mind that the clock is ticking on the Puerto Rico incentives. They have already come under attack by certain lawmakers and could be eliminated or altered.

However, when you are granted these tax incentives, you sign a contract with the Puerto Rican government. Based on past court cases, new rule changes do not alter the agreement you signed. In other words, you are grandfathered in under the rules in effect when you sign the tax decree.

There is another risk to consider, however— these tax benefits to US citizens would be eliminated if Puerto Rico became a state.

Source: ZeroHedge