The new tax law creates a huge boon for Uber and Lyft drivers

  • The new tax law gives a slightly unintentional benefit to gig economy workers and independent contractors.
  • Uber drivers, Lyft drivers, freelancers and other independent contractors will be able to deduct 20 percent of their income before paying the new lower tax rates.
  • By 2020, gig economy workers are expected to make up 43 percent of the American workforce, according to research from TurboTax maker Intuit.
Lyft Driver Gabriel Gill- Austern, left, gets a fist bump greeting from customer Dan Luria as he enters the car. Gill-Austern, is a student at Boston College Law.
Suzanne Kreiter | The Boston Globe | Getty Images
Lyft Driver Gabriel Gill- Austern, left, gets a fist bump greeting from customer Dan Luria as he enters the car. Gill-Austern, is a student at Boston College Law.

The new tax law may entice more employees to strike out on their own.

Uber drivers, Lyft drivers, freelancers and other independent contractors will be able to deduct 20 percent of their income from their taxable income before paying the new lower tax rates. This goes into effect when people file their 2018 income taxes.

Gig economy workers through services such as Uber, Lyft and TaskRabbit, as well as IT consultants in Silicon Valley, management consultants and even stockbrokers who forgo benefits and certain legal protections to work as independent contractors all qualify for this deduction.

The gig economy is rapidly growing and expected to make up 43 percent of the American workforce in two years, according to research from TurboTax maker Intuit. By 2020, 7.6 million people will be working in the gig economy, double the 3.2 million gig economy workers from 2015.

While the tax change may entice more workers into contract work, independent contractors still don't have the same protections employees do, such as health insurance and workers' compensation.

Edward Kleinbard, a professor at the University of Southern California and former chief of staff to Congress' Joint Committee on Taxation, said the discounted tax rate phases out at higher incomes very quickly.

Individuals who make below $157,500 and married couples who earn below $315,000 qualify for this 20 percent deduction.

But there are provisions that allow people above those income levels to benefit. The deduction was created for sole proprietors and owners in partnerships and other non-corporate enterprises. So those who have income from "non-corporate enterprises" can deduct 20 percent of that income before filing taxes on it.

This includes those who have money in private equity, venture capital or publicly funded partnerships, says Mark Gergen, a professor of tax law and policy at the University of California, Berkeley School of Law. He adds that these pass-through deductions were not created with the explicit intention of helping gig workers — that was a side effect.

Intuit's TurboTax is updating its software to help people figure out if they are eligible by answering a few questions. TurboTax has software geared toward helping those who are self-employed and independent contractors. Lisa Greene-Lewis, CPA and tax expert for TurboTax, said it launched this product after seeing a trend toward more self-employment.

Last year Credit Karma partnered with Uber and Lyft, and drivers could use Credit Karma Tax to prepare and file their taxes for free. "We have step-by-step guides for Uber and Lyft drivers and a dedicated support team that is available 24/7 to help people prepare their taxes," said Jagjit Chawla, Credit Karma's general manager for tax.