A Billfold LLC Tax Update
So last week I promised you an update on the whole Billfold LLC tax situation, and how it affects The Billfold, my personal taxes, and my health insurance subsidy.
Here we go.
Every year the IRS issues a 1040-ES form to help freelancers and small business owners calculate how much they should pay in estimated taxes. I haven’t done much with this form in the past, since I’d always used the “set aside a percentage of each paycheck and hope it all works out in the end” method, but I knew this year would be different for two reasons:
- The Billfold LLC is now part of my personal tax return
- The Tax Cuts and Jobs Act gives freelancers and small-business owners a 20 percent qualified business income deduction
I kept waiting for more information about that 20 percent tax deduction, such as “how to calculate it” and “whether it’s gross or net.” At first, all I heard from both news sites and CPAs was “well, we’re still waiting on more information from the IRS,” so I kept on saving 25 percent of each gross paycheck, for both myself and The Billfold.
About halfway through the year I started wondering if I was putting aside way too much money for The Billfold’s taxes. Saving 25 percent of my gross freelance paychecks made sense, especially because I don’t have a lot of freelance business expenses. But The Billfold is mostly expenses. I take out some money to pay myself, and I put some money into the “operating expenses and savings” bucket (which earned its name because we have no recurring operating expenses but still need money for once-a-year operating costs like domain name renewal, so that money comes out of opex&sav), and the rest goes to paying freelancers, except for the 25 percent that goes to taxes.
Which started feeling like an awful lot.
When I met with The Billfold LLC’s new group of CPAs, I asked them about that 25-percent-of-the-gross figure, and they said that sounded like a good amount to save. But when I wrote about paying estimated taxes last month, I got some emails from other small business owners suggesting that I was setting aside way too much money for taxes. Had I forgotten to calculate my 20 percent tax deduction?
I don’t think so, I replied. I filled out the 1040-ES, and those were the numbers I got.
I kept waiting for, like, an updated 1040-ES (“now with the 20 percent tax deduction!”) or some kind of clickbaity “here’s how to calculate your 20 percent tax deduction” article to make its way to the top of Google. Then I realized — and by “realized” I mean “read through a bunch of IRS PDFs until I figured it out” — that the 20 percent tax deduction had always been included in the 1040-ES form, under the line “If you qualify for the deduction under section 199A, enter the estimated amount of the deduction you are allowed on your qualified business income from a qualified trade or business.”
I don’t know what I was expecting. (That’s a lie. I actually do know what I was expecting: a line that read “Take Line A and multiply by 20 percent” followed by a line that read “Subtract Line B from Line A.”) I do kinda wish that all of those “hey freelancers, you get a tax deduction this year” articles would have included the words “section 199A,” because I bet a lot of freelancers and small business owners will skip right over that line, assuming it doesn’t apply to them.
Anyway. You know where this story is going. Since we’re close enough to the end of the year that I can 90-percent-accurately estimate both my and The Billfold’s 2018 income and expenses, I redid the 1040-ES, added the section 199A deduction, figured out how much estimated tax I would owe, and confirmed that I had already covered the majority of my tax burden.
This is a HUGE RELIEF, for a lot of reasons:
- I can do more with the money The Billfold will earn between now and the end of the year, since I won’t have to put 25 percent of the gross towards taxes
- I can save more money for 2019 to prepare for the bump in our freelancer pay rate
- I can pay myself a little more
- Next year, I can set aside less money every month for taxes, giving us more wiggle room in the monthly budget
So that’s the good news.
Here’s the bad news.
Since I can 90-percent-accurately estimate both my and The Billfold’s 2018 income and expenses, I can also finally come up with my new adjusted gross income. Remember: because a LLC is a pass-through entity, any money that The Billfold does not put towards expenses gets counted as part of my income — and that includes the money The Billfold pays in taxes. I knew my AGI would go up, thanks to The Billfold, but I didn’t know if it would go up to the point where I would lose my health insurance subsidy.
So, armed with my recalculated AGI, I logged into Healthcare.gov to report my life change.
Prior to taking on The Billfold, my estimated 2018 AGI was $4,573/month. Post-Billfold, my estimated AGI is $5,047/month — which is in fact enough for me to lose my health insurance subsidy. I’ll have to do some final calculations with my actual tax form next spring to determine how much subsidy money I’ll need to pay back (which, since I’m pretty sure I’ve overpaid a little on my estimated taxes, might not be a terrible amount), but it’s frustrating to see that a small bump in monthly income, part of which is going right back to the government in taxes, is enough to kick my health insurance premium from $248.86 to $548.46. (It’s a good thing my premium’s going down next year.)
Also, before you ask: I checked Healthcare.gov’s “small business healthcare” plan, and you need at least one employee who a) isn’t a freelancer and b) isn’t yourself before you can get access to small business healthcare policies. So I’ll be sticking with individual ACA plans for now.
That’s the update, and I’ve decided to be happier about figuring out the 20 percent tax deduction than sad about losing my health insurance subsidy. When I complete my 2018 taxes, I’ll do the math on whether the money I saved with the deduction is more or less than the money I lost with my subsidy. I’m pretty sure I’ll still come out ahead.
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