Will You Pay More Taxes in 2023?

This is one of the questions we hear the most from our clients. The answers vary from situation to situation, but here's a quick guideline to follow to see if you might own Uncle Sam more money in 2023.

Federal Tax Brackets Have Changed

Your first consideration should be that the tax brackets have changed. Often times, the term tax rates, and tax brackets are commonly used together but have different meanings. Tax rates are the percentage at which an individual or married couple is taxed. Tax brackets are the group or division at which tax rates have changed. In 2023, tax rates have not changed, but the tax brackets have...

In 2022, if an individual filing as "single" made $94,000, he/she would fall into the 24% tax bracket. Meaning, that the first $10,275 would be taxed at 10%, the next $31,500 would be taxed at 12%, the next $47,300 would be taxed at 22% and the remaining $4,925 will be taxed at 24%. In 2023, if that same individual made the exact same amount of money, none of their income would be taxed at 24% because the federal tax bracket for the 22% tax rate has increased, potentially saving thousands of dollars in taxes.

Bigger Deductions

Not only have the buckets for these tax brackets increased, but the standard deduction has also increased in 2023. What is the standard deduction? The standard deduction is a dollar amount that reduces your taxable income. In 2022, the standard deduction is $12,950 vs $13,850 in 2023. This huge leap is due to the fact that inflation is currently around 8% and the government is trying to assist taxpayers by providing some relief.

Of course, every situation is different. These examples may noy capture your situation but merely provide some context on how the IRS is trying to assist taxpayers in 2023. Please feel free to contact us so we can discuss your situation.

Employee or Independent Contractor?

The Department of Labor issued guidance on the difference between an employee and an independent contractor. Despite the information available to the public, many businesses are treating individuals as contractors instead of employees.

Behavioral

The Law uses a few tests to determine if an individual is an employee or an independent contractor. One of the parameters used, is determining whether or not the company controls how and what a worker must do. The control doesn't necessarily mean directing how the work is done but determining if the employer can control how the work is being completed. When the employer is instructing what equipment to use, and where to do the work, this indicates that the company wants the work done a certain way.

Financial

Do you decide when the worker is paid, how they are paid, and for how many hours the worker is paid for? If you control the aspects of when and how they get paid, it might be safe to assume that this worker might be an employee. Is the worker sending you an invoice for payment? This might be another consideration to take think about. Though most contractors are paid after an invoice is sent, companies like Uber typically consider their drivers as independent contractors. On the contrary, a delivery driver for a fast-food company can be considered an employee.

Type of Relationship

The responsibility falls on the company to examine this company-worker relationship and determine if the individual must be considered an employee. Though there is no cookie-cutter, answer for each situation, employers must document their decisions for how each worker is classified. When in doubt, consider treating a worker as an employee.

New 1099-K Reporting

During the Biden Administration, a new law was passed that required mobile-payment processing apps such as Zelle, Cash App, PayPal, Venmo, Square etc. to disclose transactions from individuals receiving more than $600 each year for services provided or goods sold.

Who Will Be Affected?

It is safe to assume that individuals receiving payments for good or services in excess of $600 will be receiving a 1099-K. Under the old law, these mobile-payment processing companies would disclose earnings of $20,000 and more, and more than 200 transactions per year. In an attempt to encourage taxpayers to report these earnings, a new law was enacted January 1st, 2022, requiring these processing apps to issue 1099-Ks for good or services.

This will include independent contractors, gig workers and other taxpayers earning taxable income from a variety of services. There are individuals who will be excluded from this reporting requirement such as taxpayers receiving funds for personal events, but it is quite possible that a 1099-K might still be issued mistakenly.

Tip:

Keep meticulous records if you receive a 1099-K for taxable transactions. Work with a tax professional to help mitigate some of the taxes owed. Likewise, if you receive a 1099-K for a personal transaction, please feel free to contact us so we can better assist you.