The IRS made numerous changes for tax year 2022 that will affect many filers, including the self-employed. If you’re not prepared for these changes, you could end up owing more (or less) than you anticipate when Tax Day rolls around.
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Here’s a look at why self-employed Americans could be in for a tax surprise this year. Also see what to do when you can’t pay your tax bill.
Some Tax Benefits Have Decreased or Disappeared Entirely
“The biggest change for the 2022 tax year is really a story about a return to the status quo,” said Eric Bronnenkant, CPA, CFP, head of tax at Betterment. “Pandemic-era tax benefits such as expanded child tax credits and stimulus checks have rolled off, and refunds for many people will be lower since these special provisions no longer apply.”
IRS Has Flip-Flopped on 1099-K Minimum Reporting Threshold
Another “surprise” is that a previously announced change will not be going into effect for this tax year. This involves 1099-K tax forms from Venmo, PayPal, Cash App and other third-party payment apps that self-employed individuals may use for payment for their products and services.
“There was an update to the 1099-K tax form, which lowered the [minimum reporting] threshold to $600, which was supposed to go into effect for the 2022 tax year,” Bronnenkant said. “However, the IRS recently delayed implementation until the 2023 tax year. Notably, the IRS stated, ‘There are no changes to what counts as income or how your tax is calculated, including income from the sale of personal assets. You must report all your income on your tax return unless it’s excluded by law.’”
Social Security Contribution Limit Has Increased
“Self-employment taxes due for 2022 may be higher for some taxpayers than they were in 2021 as the Social Security threshold, which is used to calculate the Social Security portion of FICA tax (12.4%) for year 2022, increased,” said Robbin E. Caruso, CPA, partner at Prager Metis CPAs.
For 2022, the threshold is $147,000, up from $142,800 in 2021. It will increase again for the 2023 tax year, to $160,200.
“The Medicare portion of FICA tax for self-employment taxes remains 2.9% for taxable income from self-employment for 2022 and 2023,” Caruso noted.
Tax Tips for Self-Employed Individuals
The best way to prevent any tax surprises is to be well-prepared ahead of the 2023 tax deadline, which is April 18. Bronnenkant offered the following tips:
- Report all of your income: “While this may sound straightforward, it is not always easy for people to do if they do not receive a 1099 tax form and they have income from multiple sources. The IRS expects taxpayers to report all of their income, regardless of whether a tax form is received.”
- Review all available business deductions: “Expenses can range from business travel expenses to advertising costs.”
- Familiarize yourself with Schedule C: “This is the form where business income and expenses are reported for sole proprietors.”
- Consider a self-employed retirement plan: “A self-employed retirement plan, like a SEP or solo 401(k), [can allow you] to save for retirement and receive a tax deduction. The IRS Pub 560 discusses small business retirement plans.”
- Don’t forget about Social Security and Medicare taxes: “In addition to income taxes, self-employed individuals have to pay Social Security and Medicare taxes as the employer and the employee. See Schedule SE.”
- Take the qualified business income deduction if you are eligible: “Sole proprietors may be eligible for a 20% deduction based on their business profits. This is in addition to normal business expenses.”
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