Updated on January 14, 2022
2022 New Tax Rule, Income Tax Rates, Deductions and Brackets For Business Owners: What You Need To Know
2022 is off and running with plenty of golden opportunities for business owners. However, you must also bear in mind the onset of the 2022 tax season which begins on Monday, January 24, 2021. Still, the 2022 tax season isn’t business as usual. There are numerous new tax law changes in 2022, increase in income brackets, charitable giving deductions, expanded Child Tax credit, and lots more to consider.
Whether you are a freelancer, independent contractor, entrepreneur, small business owner, or have a side hustle, the 2022 new tax rules bring a myriad of challenges you must overcome.
In this guide, we will talk about the new tax law changes in 2021 and 2022, when these laws take effect, and how you should prepare for tax season in light of these rules.
2022 and 2023 Tax Seasons: Overview
Let’s kick up with the biggest details you must realize about the 2022 tax season:
- The big tax deadline for all federal tax payments and returns will be April 18, 2022
- Standard deductions for 2021 increased to $12,550 for single filers and $25,100 for married couples filing jointly.
- Income tax brackets also rose higher in 2021 because of inflation.
For the 2023 tax season, when the time comes;
- Income tax brackets will also increase in 2022
- The standard deduction for 2022 (used in filing in 2023) will rise to $12,950 for individuals and $25,900 for married couples filing jointly.
However, this is just a snapshot of the income brackets and rates for the 2022 and 2023 tax seasons. Here’s a chart showing 021, 2022, and 2023 Marginal Income Tax Rates and Brackets.
2021 Marginal Income Tax Rates and Brackets
|2021 Marginal Tax Rates||Single Tax Bracket||Married Filing Jointly Tax Bracket||Head of Household Tax Bracket||Married Filing Separately Tax Bracket|
|37%||Over $523,600||Over $628,300||Over $523,600||Over $314,150|
2022 Marginal Income Tax Rates and Brackets
|2022 Marginal Tax Rates||Single/Unmarried Tax Bracket||Married Filing Jointly Tax Bracket||Head of Household Tax Bracket||Married Filing Separately Tax Bracket|
|37%||Over $539,901||Over $647,850||Over $539,900||Over $323,926|
Not sure how tax rates and income brackets work? Here’s an overview: Your tax rate is the percentage of your income that you pay in taxes. It is based on what tax bracket (income range) you fall in. For instance, if you are single and your income is $75,000, then you should be in the 22% tax bracket. But the tax rate won’t be the flat 22%. Instead, your income will be taxed at 10%, another at 12%, and the last part at 22%.
But then income brackets aren’t the only changes, there are also new tax rules governing the small business landscape.
New Small Business Tax Rule for 2022
As stated, from the start of 2022 (January 2022), any small business or freelancer that gets paid from a digital payment service of a third-party payment provider such as Venmo, Zelle, Cash App, PayPal, which facilitates credit card processing on their behalf will have to report the amount to the IRS.
The amount must also be more than $600 in total incurred during the year.
This means that whether you are an e-commerce owner, freelancer, or any other small business that uses a digital payment service, your provider must report directly to the IRS when the total amount is $600 and above. What the provider of your payment will do is send you a 1099-K form where you are obligated to report all payments made through your third-party payment provider as gross income.
Who Will Receive Form 1099-K In 2022?
The new tax law changes will affect all kinds of sellers, solopreneurs, entrepreneurs, freelancers, independent contractors, side hustlers, and so on. This is because the income threshold of $600 over a year, is in reality small.
Before, now homeowners who rent their vacation properties via a marketplace, sellers of collectibles on the internet, individuals earning extra cash via websites online through babysitting, cleaning houses, making deliveries, and other services, did not need to fill the Form 1099-K because they did not meet the threshold of $6,000. However, all will likely have to fill and report their extra income using Form 1099-K.
Beyond these groups, the new tax rule 2022, will also affect sellers on e-commerce marketplaces such as Etsy, eBay, and Amazon.
So if you sell on any of these platforms, you should expect to receive a 1099-form after January 31, 2023, from your payment services provider to ensure that all revenues are duly reported to the IRS on your business’s behalf for purchases made in 2022.
What’s Truly Changed With The New Tax Laws 2021 and 2022?
Of course, you should already be reporting your income anyway. The 1099-k and reporting income from payments received through peer-to-peer payment systems began in 2012, though the threshold was higher. A seller would only need to report income to the IRS after receiving $20,000 worth of payments yearly and there were at least 200 transactions on their account.
Later, the threshold was reduced from $20,000 to $6,000 with no minimum transactions. The only requirement was that reporting applied to sellers of goods and services but not personal payments. Now the threshold is lower and should encompass over 30 million small businesses, solopreneurs, and independent contractors in the US.
However, it’s not uncommon for many small business owners and freelancers to have trouble organizing their revenue. Reports show this is because payments often happen haphazardly (unlike income from salaried employment) and sometimes smaller payments get forgotten.
Now because of the tax change, the IRS will be able to accurately calculate the earned income tax for any business regardless of whether the business reports the income or not.
Why the New Tax Rules?
Reports state that the new tax rule is because of changes in the American Rescue Plan Act of 2021. The act is a $1.9 trillion economic stimulus bill developed to foster US recovery from the health and economic effects of the COVID-19 catastrophe.
There’s no doubt that the new tax laws are annoying especially for independent contractors with complex tax situations. However, the new rules are entire to everyone’s benefit and will help deal with different kinds of fraud by making transactions more transparent, no matter the medium.
How to Factor the 1099-K Form When Reporting and Calculating Your Income Tax Returns
When calculating your income tax returns in the 2022 tax year, you will consider the amounts shown on your 1099-K only reflects gross receipts and so you have to keep highly extensive records. This would be extremely frustrating for many small business owners and solopreneurs whose sales through e-commerce marketplaces incur varying levels of processing and delivery costs.
Consider that the Form 1099-K does not reflect the various deductible expenses often connected with that ‘extra’ income such as depreciation and utilities for homeowners, the basis of property sold by sellers, the cost of mileage for delivery drivers, and lots more. All these typically must be considered before any taxable income is determined. Bloomberg Tax provides a unique example of the situation;
Suppose a model train collector may have paid $5,000 for model train pieces over several years that now sell for $8,000 and the marketplace connected the seller to the buyer and through which the sale took place and the marketplace charged the seller a total fee of $4800. Following this fee, the model train seller spends $200 on postage to deliver the pieces to the buyers. The Form 1099-K that the digital payments service will send to the IRS will bear the gross of $8,000 without bearing in mind the fact that the seller’s taxable gain is only $2,000.
In a different scenario, a teenager walks dogs to earn extra money. If the income in 2022 exceeds $600, their expenses may be limited by the fees that the marketplace charges to connect them to pet owners, but they will owe income tax and self-employment tax on the income they earn.
Hence, to ensure that the IRS becomes aware of these discrepancies, all online sellers, and other small business owners with complicated scenarios such as this should keep extensive records of their expenses to avoid over-reporting of income and overpayment of tax. So your income tax returns report should be comprehensive, so the IRS can cross-reference without hitches.
Nevertheless, we do understand that the upcoming filing season could be frustrating for tax preparers and taxpayers because of the backlog of unprocessed returns from 2021, pandemic-related delays, and years of budget cuts. But then you can submit your 2021 tax returns anytime from January 24 to April 18, 2022. Do note that April 18 (or 19) is the last day to file or request an extension. So the earlier you file, the better to receive any refunds you are due at a faster rate.
Other Considerations When Filing Your Income Report
The Coronavirus caused a ripple effect which will still influence how you file your taxes this year. You need to keep in mind stimulus checks and paycheck protection programs (PPP) loans. Fortunately, if you received a stimulus check it won’t be counted as taxable income but treated as a refundable tax credit for 2021.
Concerning the PPP loans, the IRS in December 2020 announced that any eligible expenses you paid with money from those PPP loans can be deducted from your taxable income. So while the PPP ends in 2021, you need to ensure to get your loan forgiveness application approved by the Small Business Administration before you can breathe a sigh of relief.
When To Disregard The 1099-K In Calculating Earned Income Tax
1. Personal gifting
According to Bloomberg Tax Reports, transactions for personal gifts, reimbursements, and charitable contributions will be specifically excluded from Form 1099-K reporting. So when filing the 1099-K form, it’s crucial to report the gross amount of reportable transactions for each month and the entire year in separate boxes on the form. Because of the provider of your payment, we also recommend that you use commercial and personal agreements to differentiate personal gifts, charitable contributions, and reimbursements from goods and services.
2. Working as an independent contractor for a company
If you are an independent contractor working for a company and you receive over $600 through a payment service, you will possibly receive a 1099-K from the payment service and 1099-MISC from that company. In this case, you would report using the 1099-MISC and disregard the 1099-K.
Tax Credits and Deductions To Also Consider For Tax Season 2022
Deductions and credits are also highly important to you as well. Tax deductions will lower the amount of your income that is actually taxed. You may access some deductions after itemizing your deductions while others are available if you just take the standard dedication.
Tax credits, in contrast, are dollar amounts subtracted from your tax bills and categorized as refundable and nonrefundable credits. If a credit is higher than the amount you owe, you will be paid a refund as this is a refundable credit. If it’s a nonrefundable credit, your tax bill will be reduced to zero. This means no refunds, but then no payments either. Here are some credits and deductions to claim on your 2021 tax return for small business owners:
1. Charitable deductions
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded two charitable giving changes established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The law allows you to deduct up to 100% of your adjusted gross income (AGI) which is your entire income minus other deductions you have already taken, in qualified charitable donations, as long as you are itemizing deductions. If you choose to take the standard deduction, then you may claim up to $300 ($600 for married filing jointly) for charitable contributions paid in cash.
2. Self-employment deductions
If you are self-employed, you can claim a bunch of deductions including home office dedication if you use a part of your home to conduct business and travel expenses. Do realize that if you are among millions of workers sent home to work remotely (and not as an independent contractor), the home office dedication won’t apply to you.
Frequently Asked Questions About The 2022 New Tax Rules For Small Business
Does the new $600 tax law apply to 2021 taxes or only 2022 and beyond?
No, it doesn’t. Do realize that the 2022 new tax rules actually took effect on January 1st, 2022, and so does not influence the fact that you are actually filing your 2022 taxes.
When can you start filing taxes in 2022?
The IRS will begin accepting income tax returns between January 24 to January 31, 2022.
Will there be delays in income tax credit refunds?
Returns with EITC or CTC might deal with delays in refunds until March to verify credits. The delay is deliberate to prevent fraudulent refunds from being issued.
Does the new $600 tax rule apply to Apple Pay?
Absolutely, it applies to all 3rd party payment platforms offering you credit card processing online and is not limited to Apple Pay, Facebook Pay, CashApp, Paypal, Venmo, Square, Stripe. All of these platforms will be required to report and send a 1099-k if you receive over $600 over the entire year.
Will I be required to fill in any additional information?
You should expect your 3rd party payment provider to request additional information such as tax ID or social security number, if you haven’t already provided them before now.
Are tax tables changing for 2022?
That’s because the inflation factor used to adjust federal tax withholding tables has risen about 3% for 2022 due to inflation indexing, far more than last year’s factor of about 1%. The adjustment lowers the amount of taxes deducted from paychecks, raising take-home pay.
What are the income tax brackets for 2022?
Besides the 2022 new tax rules, the IRS also announced higher federal income tax brackets, and standard deductions for 2022, which reflects higher price levels because of inflation. The top federal tax rate remains 37% for 2022, less of your income will possibly get hit by this tax rate until their taxable income exceeds $647, 850 for 2022. This is $20,000 higher than tax brackets in 2021.
Nevertheless, you must realize that these are automatic changes every year to tax brackets based on inflation. Individual taxpayers will enter the top federal tax bracket with incomes of $539,000. Overall most tax brackets will rise by over 3% from the tax year 2022. These increments in federal tax brackets are the biggest in the last four years.
Is there a new W4 for 2022?
The draft version of the 2022 Form W-4, Employer’s Withholding Certificate was issued December 21 by the IRS. 2022 standard deductions would be $12,950, single or married and filing separately, $19,400, head of household, qualifying widow or widower; $19,400 and $25,900, married filing jointly.