Frequently Asked Questions About The 2022 New Tax Rules For Small Business

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
10% $0–9,950 $0–19,900 $0–14,200 $0–9,950
12% $9,951–40,525 $19,901–81,050 $14,201–54,200 $9,951–40,525
22% $40,526–86,375 $81,051–172,750 $54,201–86,350 $40,526–86,375
24% $86,376–164,925 $172,751–329,850 $86,351–164,900 $86,376–164,925
32% $164,926–209,425 $329,851–418,850 $164,901–209,400 $164,926–209,425
35% $209,426–523,600 $418,851–628,300 $209,401–523,600 $209,426–314,150
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
10% $0–10,275 $0–20,550 $0–14,650 $0–10,275
12% $10,276–41,775 $20,551–83,550 $14,651–55,990 $10,276–41,775
22% $41,776–89,075 $83,551–178,150 $55,991–89,050 $41,776–89,075
24% $89,076–170,050 $178,151–340,100 $89,051–170,050 $89,076–170,050
32% $170,051–215,950 $340,101–431,900 $170,051–215,950 $170,051–215,950
35% $215,951–539,900 $431,901–647,850 $215,951–539,900 $215,951–323,925
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.