Last year, the Tax Cut and Jobs Act went into effect on January 1st. While there’s nothing as major on the books for 2020, there are some important changes online sellers should be aware of, especially those who are self-employed.
Barbara Weltman, author of J.K. Lasser’s Small Business Taxes, explains what sellers should look out for as they get ready to prepare 2019 taxes and send their final estimated tax payment due on January 15, 2020.
EcommerceBytes: You wrote recently about changes to the self-employment tax next year. Can you explain what’s changing and how this impacts online sellers?
Barbara Weltman: If you’re successful, you’re going to be paying more in self-employment tax, which is the tax that self-employed individuals pay to cover their Social Security and Medicare tax responsibilities. The Social Security wage base for 2020 is increasing on January 1, 2020, to $137,700 (up from $132,900). This means that self-employed individuals may pay an additional $595.20 ($4,800 x 12.4%).
The rule permitting one-half of self-employment tax to be deducted from gross income is unchanged. But keep in mind that this deduction negatively impacts the amount of the qualified business income (QBI) deduction.
This additional amount of self-employment tax for high earners must be taken into account in figuring estimated tax payments for the year. For those who routinely set aside funds for estimated taxes, keep any additional self-employment tax in mind.
EcommerceBytes: You also said there were changes to the form filed with the IRS that reports payments to self-employed individuals (normally Form 1099-MISC). What’s changing, and who does this impact?
Barbara Weltman: Starting next year, payments to self-employed individuals won’t be reported on Form 1099-MISC. Instead, a new Form 1099-NEC will be used. While the IRS hasn’t said why there is a new form, likely it’s to help companies better comply with the filing deadline (the 1099-MISC must be filed with the IRS by January 31 of the year after the year of payment(s) if box 7 for nonemployee compensation is completed but by the end of February if filing on paper or the end of March if filing electronically).
This means that payments in 2020 of $600 or more to independent contractors will be reported on the new form. And the filing deadline will be the end of January following the year of payment(s). While the IRS has posted a draft of the new information return, details (including instructions for the new 1099) have yet to be disclosed.
EcommerceBytes: So that means we don’t have to worry about the new Form 1099-NEC until January of 2021, correct?
Barbara Weltman: Correct. The new form is for services performed in 2020 and will first be filed in 2021.
EcommerceBytes: “IRS scrutiny” is never something any taxpayer wants to hear, but you had a warning for Schedule C filers. What should they expect?
Barbara Weltman: While the rate on overall audits is at historic lows, expect to see increased IRS focus on Schedule C filers.
The IRS has noted that these taxpayers are disproportionately responsible for the “tax gap” (the spread between what the government takes in – revenues – and what it believes it should be taking in – tax liability).
EcommerceBytes: Are there other changes that self-employed sellers will have to worry about in 2020?
Barbara Weltman: Watch for changes in state and local tax laws, such as changes in sales tax rates and rules. For example, Georgia’s sales tax rule for remote sellers applies as of January 1, 2020, to those with $100,000 of revenue or 200 transactions.
Check the rules for collecting and remitting sales tax on remote transactions if you sell out of your own state.
Barbara Weltman has written the book on small business taxes – she literally does this every year! The changes she explained above serve to highlight the importance of keeping up-to-date and getting expert advice. We advise readers to learn more about her books and free email newsletter on BigIdeasForSmallBusiness.com and stay up to date via her Twitter feed.