Being self-employed in NYC can be extremely lucrative. With a population of over 8.5 million people, you’ll be sure to find a customer or potential client on every street corner. With such a huge marketplace it’s no wonder why people setup shop in the Big Apple. Although there are advantages of working in NYC there are also disadvantages – specifically, NYC taxes. This article will highlight everything you need to know about being self employed in NYC and the taxes you might owe.
Unincorporated Business Tax
The unincorporated business tax (UBT) is a broad-based tax which covers a wide range of businesses. Unincorporated businesses include:
- Professions and certain occupations of an individual
- Limited liability companies
- Estates or trusts
Even partnerships and LLCs, which are pass-through entities for federal tax purposes, have to pay taxes at the entity level. This is because NYC does not recognize the flow through status of these entities and considers them “unincorporated” businesses.
There is a 4% flat rate on all income that is attributable to NYC. Typically, if you are self-employed and work full-time in NYC this means all of your income would be taxed at this 4% rate.
There are some exceptions though:
- Performing services as an employee is not subject to UBT.
- Those whose primary business is holding real estate property for themselves (e.g. a person who owns and rents a two-family house) won’t pay UBT.
- Entities engaged primarily with qualifying investment activities are partially exempt from UBT on the income.
- Associations and publicly traded partnerships treated as corporations for Federal income tax purposes; and S-Corporations are subject to the General Corporation Tax.
UBT Tax Credit
In addition to the UBT, self-employed individuals will have to pay NYC tax on personal income. Individual tax rates rage from 3.078% to 3.876% so an additional 4% tax would push tax rates as high as 7.876% (which does not include federal income tax, self employment tax, and New York State income tax).
Luckily, there is a credit for amounts paid toward UBT. The credit allows New York City residents or part-year residents with city taxable income of $42,000 or less to deduct 100% of the UBT imposed from their NYC tax liability. The credit decreases gradually from 100% to 23% for taxpayers with city taxable incomes more than $42,000 but less than $142,000.
For taxpayers with city taxable incomes in excess of $142,000 the credit tops off at 23% of the UBT imposed. However, the credit cannot reduce an individual’s tax liability below zero and the credit cannot be carried forward to future tax years.
Estimated Tax Payments
If you are self-employed then you may need to pay estimated taxes. You are exempt from paying estimated taxes if you expect your tax withheld during 2018 to be at least:
- 90% of the tax shown on your 2018 return.
- 100% of the tax shown on your 2017 return if your New York AGI (or net earnings from self-employment allocated to the MCTD) is $150,000 or less ($75,000 if married filing separately for 2018).
- 110% of the tax shown on your 2017 return if your New York AGI (or net earnings from self-employment allocated to the MCTD) is more than $150,000 ($75,000 if married filing separately for 2018).
To be on the safe side, it is prudent to pay 110% of last year’s tax due to avoid interest and penalties.
Don’t Let Taxes Scare You
Although the cost of doing business in NYC is exceptionally high there are massive business opportunities that cannot be passed up because of complex tax law. Don’t let NYC tax scare you away from owning and operating your own business in one of the largest cities in the world. Consult a tax advisor about your specific tax situation and get back to hustling in the big city.
This article is intended for informational purposes only and should not be relied upon as tax, legal, investment or any other paid professional advice.