This is the time of year when business columns turn their attention to tax strategies for the coming year. The lighting, projection and staging businesses are heavy with freelance professionals and that's a topic that's right in their wheelhouse. However, 2011 is going to be a wild ride for freelancers when it comes to both taxes and healthcare legislation. For starters, we nearly started the New Year with a lot of uncertainty about what the actual tax rates are going to be. As it turns out, it looks like the status quo will be maintained, based on a tentative deal between the Obama administration and Republicans in Congress, who have agreed to an extension of lower tax rates and higher credits, established by the Bush administration in 2001, for single taxpayers who earn more than $200,000 a year and couples earning more than $250,000. (Although they were playing it right up to the deadline wire in December.) This keeps marginal tax rates at 10, 25, 28, 33 and 35 percent. (Absent the agreement, they would have risen to 15, 28, 31, 36 and 39.6 percent.)
A Land Mine
But a major area that freelancers are going to have to worry about is a land mine planted in otherwise well-intentioned healthcare legislation. An all-but-overlooked provision buried in the 2,409-pages of 2010's health reform law could swamp U.S. businesses with a flood of new tax paperwork, right down to the sole proprietor LD, technician, gaffer, projectionist and so on.
Section 9006 of the health care bill mandates that beginning in 2012, all companies will have to issue 1099 tax forms, not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year. Individuals whose main interaction with Form 1099 – the IRS form used to document income for individual workers other than wages and salaries – is getting them at the beginning of every new year will now find themselves having to issue them, and lots of them, tracking every expenditure to every vendor to which they pay more than $600 during the course of the year.
As a result, businesses will have to issue millions of new tax documents each year. Under the new rules, if a freelance lighting designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. The same for a desk at Office Max, or new projector bulbs from Panasonic. The bill expands the scope of Form 1099 by using it to track payments not only for services but also for tangible good, and it requires that 1099s be issued not just to individuals, but also to corporations.
The new 1099 provision was tacked on to the healthcare legislation to help pay for it. What it will do, if left unchanged, though, is create a mountain of paperwork costly enough to virtually offset any additional revenue gleaned from tighter reporting of smaller transactions and contracts. A hue and cry was raised about this time-bomb provision once the mainstream press discovered it, and companies, organizations and individuals have been bringing pressure on legislators to severely curtail or kill it altogether. The problem is, it's a part of the math that funds the very same healthcare reform that will benefit self-employed individuals the most: removing it undermines the entire economic premise.
Some Bright Spots
On the other hand, the health care legislation has some bright spots for businesses (if healthier workers aren't the brightest spot of all) and freelance professionals. The new law gives small firms tax credits as incentives to provide coverage, starting this year. Employers with 10 or fewer workers and average annual wages of less than $25,000 can receive a credit of up to 35 percent of their health premium costs each year through 2013. (The credit is phased out for firms larger than that and disappears completely if a company has more than 25 employees or average annual wages of $50,000 or more.) Also, 2011 W-2 forms will have to reflect the value of any employer-provided healthcare insurance. And starting in 2013, a 0.9-percent Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples.
So, freelance professionals will have a very changed landscape before them in 2011. The problem is, until Congress acts, no one will really know what that landscape looks like.
