Can I turn myself into a pass-through corporation in order to save money on income tax?

Question

Given the pending changes in the tax code, I'm wondering if I could legally structure myself as a pass-through corporation in order to decrease my income tax bill. How would I go about doing this? How can I calculate whether this would decrease my tax? Would I need to incorporate before the end of 2017 in order to save money on this year's taxes?

Previously I included information here about my personal tax situation, but actually I am more interested in the general answer to this question. What sort of worker would benefit from declaring themselves pass-through, assuming they have the option to do so?

I've read several articles in the NY Times about this strategy. The tone of the articles suggest that the writers view this as a tax dodge which would mainly suit highly-paid professional workers who can choose to report their income as freelance/contractor (on a 1099-MISC form).

• "Hacking the Tax Plan: Ways to Profit Off the Republican Tax Bill"
• "Tax Plans May Give Your Co-worker a Better Deal Than You"
• "Under the Trump Tax Plan, We Might All Want to Become Corporations"

The articles also suggest that this strategy requires an expensive accountant because the paperwork is beyond the ability of the average person to figure out on their own.

The closest I could find to a tutorial-style article on this topic is this Vox article:

• "Trump wants to create an amazing new tax loophole — here's how to use it for yourself"

It makes it sound pretty easy: Form a sole proprietorship, report all your income on a 1099-MISC, calculate the amount extra you have to pay in health insurance, and you're done.

My issue with these articles is that I wonder if they are editorializing and making this sound easier than it is, in order to implicitly criticize the tax bill. I am hoping to hear from tax experts on this forum about whether this strategy is viable, and if so, which kinds of workers would benefit most.

Answer 1

I am not an accountant, so I do not know whether or not this made it through to the final bill, but IIRC, not all professions are eligible for the deduction. According to this article, the IRS might need to look at each individual business to determine whether or not it qualifies for the deduction. Meaning even if you did convince your employer to let you get paid through this way, you could still end up without the deduction, and could end up taking home less due to needing to pay your full Social Security tax. This is one of the reasons why the tax benefits will likely only benefit those who can afford accountants.

It's probably more important however to concern yourself with the non-tax consequences of becoming an independent contractor. If you turn yourself into an independent contractor, you will likely lose the few protections granted to workers in the US, and may end up losing out in the end, even if you are in a state that provides greater rights to workers.

You mention your industry is academia, but you don't mention whether you are tenured or not. Academia is an industry that suffers quite a bit in periods of slow economic growth, meaning you could end up losing your job if we get another recession, especially if you are not tenured. As an independent contractor, you would likely not be eligible for unemployment and it would likely be easier for your employer to let you go.

Additionally, you would need to pay for your own health and life insurance, which could become very expensive, especially considering the tax bill also got rid of the individual mandate, which is expected to cause a rise in premiums. Although you may still have a net gain in your after-tax income, needing to worry about finding your own health insurance and other benefits may add additional stress in your life, making your quality of life decrease as a hole.

Another issue not mentioned is that it's not a guarantee that this loophole will last very long. The tax bill was tremendously unpopular and while some Republicans are betting its popularity will rise, that's not a guarantee. If the next couple elections flip many seats from the GOP to the Democratic party, it's possible the exception will not last long enough for you to see much of a benefit from the loophole. And if turning yourself into an independent contractor saves your employer money, you may have trouble convincing them to convert you back to a normal employee if the tax benefits expire.

While turning yourself into a pass-through corporation could benefit you on the short term, the long term benefits are less certain as they rely on the political landscape, and you could end up worse off than before.