Current tax law is moderately unfriendly to employees, more friendly to folks who can structure their businesses as sole proprietorship or partnerships. Sole proprietor expenses are deductible above-the-line, reduce adjusted gross income, and are deductible for AMT purposes. Employee expenses are only deductible below-the-line, are subject to the 2-percent floor and the overall limitation on itemized deductions, and are not deductible at all for AMT purposes.
Under the House Republican bill, things are about to get much worse.
If House Republicans get their way, you, as an employee, will still be taxed at a top rate of 39.6%. With an exception for service providers (like lawyers), however, “business income” derived through partnerships or LLCs will now be taxed at a top rate of 25%. Even service providers, however, will be eligible for that 25% rate if they incorporate, and business income derived by run-of-the-mill corporations will be taxed at a top rate of 20%.
Nor are changes to the rate structure the bill’s only problem for employees.
If your company forces you to incur job expenses, you will no longer be able to deduct them at all. If your employer pays for daycare for your young children so you can afford to work, you will be taxed on that payment. The credits that employers used to get for making day care available to working employee-parents will also be repealed. And if your employer pays part of your tuition for continuing education, you will be taxed on that payment.
Be comforted. The revenues generated by these tax increases on employees will go to fund a good cause – the tax cuts I’ve summarized above for large corporations and unincorporated businesses. The theory is that the benefits of tax cuts for employers will eventually trickle back down to the employees who are funding them. This was, of course, the argument made to support tax cuts for the rich back in the 1980s. Unfortunately, that trickle down never happened. Median income has been stagnant in the US for the three decades since. Perhaps this time trickle down will work better.