Self-employed individuals are sole proprietors, independent contractors, partners, and members of limited liability companies. They’re business owners. They’re not employees, they don’t receive wages, and they’re not covered by income tax withholding on wages. They have their own challenges and opportunities—in taxes, finances, and business.
In 2020, some tax-related things are going to change. Here’s what to expect.
Taxes for the self-employed
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.
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.
Increased IRS scrutiny
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).
Of all the businesses in the U.S., 93.8% of non-employee firms are owned by self-employed individuals (and 25.9% of small employer firms are owned by self-employed individuals). Given the continued growth in the gig economy, these numbers can be expected to grow. What else will 2020 bring? Who knows?