The gig economy has been expanding over the last handful of years, and the newly implemented tax plan may escalate that trend. The 2018 tax law offers benefits for businesses classified as LLCs or S-Corps. Here’s what that could mean for recruiting and staffing agencies.
Disclaimer: This article is provided “as is” without any warranty expressed or implied. This article does NOT constitute financial or tax advice. Crelate makes no claims that the information in this article is either complete or accurate. Crelate is does not provide legal or accounting advice. Please consult with your tax professional to determine how the new tax laws might apply to your business.
Finally a tax break to help small business
First, the most straightforward impact of the new system. Many agencies are structured as “pass through” entities such as a Limited Liability Company (LLC), sole proprietorship or S-Corporation.
Pass through entities are organizations that are not directly taxed. Instead, the owner of a pass through entity is taxed individually on the income, while accounting for their share of the profits and losses. This prevents double taxation.
The big news is that businesses like this are finally get a real break. They will be able to deduct 20% of their business income before applying the personal income tax rate. This is great for talent placement agencies filing under corporate status.
Additionally, it may get easier for agencies to write off some of their equipment and use expenses, since computers and peripheral equipment are no longer considered “listed property” and will not be subject to the heightened substantiation requirement. This simplifies the recordkeeping and justification for work computers provided to employees. Company-provided computers will now be treated the same way that employer-provided cell phones have been treated since the tax changes in 2011.
Finally, changes to the Alternative Minimum Tax can benefit agencies and their owners, as the points where the AMT is triggered are being raised. The Alternative Minimum Tax is a set tax rate which includes fewer deductions and is applied to tax filers who are above a certain income level. The purpose of the AMT is to ensure that individuals in higher income brackets pay at least some taxes.
Taxpayers in these higher income brackets must calculate how much their taxes would be using the standard income tax and how much they would pay under the alternative minimum tax, and pay whichever tax is higher.
Under the new tax law, it’s estimated that the AMT will apply to about 200,000 taxpayers, which is a significant reduction from the estimated 5 million taxpayers in 2017.
The move to contract might accelerate
The second, indirect effect of the new tax law is that it offers incentive for full-time employees to become contractors. This trend is already well-established, especially among Boomers. Becoming a contractor won’t be lucrative for every full-time employee, though. The tax savings will have to at least cover the cost of the employer-provided benefits the employee would lose by becoming a contractor.
Companies might also use the tax incentive to encourage some full-time employees to become contractors to cut employment costs, since contractors can be cheaper and more flexible than regular employees. The mix of the two could accelerate the shift to a more agile workforce.
Plan to ride the wave
For recruiting and staffing agencies that offer contract recruiting and placement services to contractors, this could mean a boost in business. Additionally, if the trend toward gig work really takes off, it could mean more clients for all talent placement businesses.
As the number of contractors grows, the market for good full-time employees will become less saturated, enabling those preferring traditional employment to shop around for the best pay and benefits packages, and make a move to the best employer. So, it’s possible that talent focused agencies across the board receive an influx of business.
Changes might mean more competition
As with everything, there’s another side to this coin. More contractors working under corporate status means that talent placement agencies may get more competition from freelancing sites and web hosting companies.
Online freelancing marketplaces like Upwork and Fiverr offer contractors a wealth of opportunities to secure their own gigs, and affordable web hosting like BlueHost enables workers who incorporate an affordable space to offer their services.
The 2018 tax provisions expire at the end of 2025. While not indefinite, this is certainly enough time to give those filing as pass through entities ample opportunity for growth.
Nothing is certain yet, but the gig economy looks to grow even stronger. There are likely to be some growing pains, but the encouragement of the gig economy also presents some great opportunities for recruiting and staffing agencies to serve untapped talent, and capitalize on the new ways of working.
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