December 2023

4 Common Misconceptions About Form 1099-K for 2023

Updated for tax year 2023.

If the new 1099-K reporting thresholds have you confused as an online seller, you’re not alone. But don’t worry — we’re here to help you separate fact from fiction.

Below we’ll address some common misconceptions you might have heard about these changes and the truth about how your taxes could be affected.

Misconception 1: This is a new tax that I will have to pay on my profits.

The truth: This change is not a new tax imposed on online sellers but a new reporting requirement for third-party payment platforms and online marketplaces. Any income derived from a sale has always been reportable income for online sellers.

Previously, and continuing for 2023, you will only receive Form 1099-K from the third-party platform if you hit $20,000 in gross payments and 200 transactions annually (the only exceptions would be if your state has a lower threshold or you were subject to backup withholding). The IRS has lowered this threshold for tax year 2024, meaning online marketplaces must report gross sales that equal or exceed $5,000 on a Form 1099-K beginning in tax year 2024. This is part of a phase-in process by the IRS to eventually implement a $600 threshold in 2025.

Due to these changes, many sellers who have not received a Form 1099-K before will begin receiving the form in the coming tax years.

Misconception 2: All the transactions on my 1099-K are taxable.

The truth: Receiving a Form 1099-K doesn’t automatically mean you’ll owe income tax on the gross sales amount reported to you. You are taxed on your net income, but a 1099-K only shows your gross receipts. The amounts reported on Form 1099-K do not consider your cost basis and any adjustments for fees, refunds, credits, etc.

If you sold an item at a net loss against its original cost basis, you should report it as a loss on Schedule 1 or Schedule D. You will not be responsible for any income taxes on the sale.

When filing your tax return, use your Form 1099-K as an informational document to help you fill out Schedule C to report business profit and losses (if you are a sole proprietor) or Schedule D to report capital gains and losses (if you are a casual seller). Then make any necessary adjustments to make your tax return consistent with your own records. That’s why good bookkeeping is key.

Misconception 3: I’m only a casual seller, not a business, so I don’t need to report my sales profits as income.

The truth: Taxable income includes any income made from sales, whether you’re a casual seller, hobby seller, or a business.

For example, let’s say your hobby is thrifting old pieces of furniture, and sometimes you flip them for a profit. Last year, you bought a used piece of furniture for $100, restored it, and sold it online for $700. This gives you a $600 profit. Unlike a business, as a hobby seller, you cannot deduct expenses incurred before the sale, such as the cost of restoring the furniture, but expenses on the actual sale (like any fees you paid to the online marketplace) can be added to your cost basis to reduce your gain.

If casual selling becomes a regular profitable occurrence, the IRS may start to consider your hobby to be a formal business. Turning your hobby into a business could make you eligible for certain business tax deductions.

You can check the IRS’s guidelines for determining when a hobby becomes a business here. If you have questions about the differences between hobby selling and business selling, TaxAct Xpert Assist℠ 1 is an add-on feature that allows you to connect with a tax expert and get your questions answered in real time.

Misconception 4: I will be paying tax on all items I sell, even if it’s at a loss.

The truth: Income is determined by deducting expenses from the final sale price and determining if the transaction yielded a profit or a loss. Only the profit is considered taxable income, so you won’t owe any taxes on something you sell at a loss or for less than what you paid. We may sound like a broken record here, but for this reason, be sure to practice good bookkeeping for your taxable and nontaxable sales as an online seller.

We’ll look at a nontaxable transaction this time. Imagine you bought a new bike for $1,000 last year and then sold it online for $700 this year. Because you sold the bike at a loss, there would be no income to be recognized on this sale even though the transaction may be reported on the 1099-K you received from the payment platform. Instead of reporting the sale as income, you would report it as a loss using either Schedule 1 or Schedule D.

For more information about how to report capital asset gains and losses on your tax return, check out our comprehensive guide to capital gains taxes.

The bottom line

While the 1099-K changes this year may be confusing for casual sellers and small businesses who have never seen this form before,we want to keep you and other sellers informed and prepared for next tax season.

1TaxAct Xpert Assist is available as an added service to certain users of TaxAct’s online, consumer prepared 1040 product. Service hours limited to designated scheduling times and by expert availability. Some tax topics or situations may not be included as part of this service. View full TaxAct Xpert Assist Terms and Conditions.

All TaxAct offers, products and services are subject to applicable terms and conditions.

IRS CIRCULAR 230 DISCLOSURE: Any U.S. tax advice contained in this communication is not intended to be used for the purpose of either (i) avoiding penalties that may be imposed, and (ii) supporting the promotion of any matters addressed.

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How to Tell If You’re a Household Employee

If you work as a caregiver in someone’s home — as a babysitter, nanny, pet sitter, or nurse, perhaps — are you considered an employee?

Understanding the distinction between household employees and independent contractors is crucial for tax purposes. Let’s explore the frequently asked questions surrounding this topic to clarify your responsibilities and rights:

At a glance:

Caretakers such as nannies and babysitters are almost always considered household employees by the IRS.
You are considered an employee if your employer dictates how and when you work.
Household employees are W-2 employees, and employers are responsible for withholding certain taxes from their wages.

What is a household employee?

The Internal Revenue Service (IRS) defines a household employee as someone who does household work in or around the home. You are considered a household employee if you were hired to do household work at your employer’s residence, and your employer has control over what work is done and how you do it.

You can be a household employee for full-time or part-time work, whether you were hired through an agency or independently.

For example, say you’re hired to provide childcare and cleaning services for a family three days a week. The family hired you through an agency, and they give you specific instructions about your childcare and cleaning duties, providing you with all the necessary supplies to do your job. Under these circumstances, you are their household employee.

What are the differences between an employee and a contractor in a household setting?

As an employee in a household setting, you must adhere to your employer’s instructions and operate within their home. However, a contractor functions independently, often providing services on their own terms and using their own tools. Differentiating between the two is crucial for tax purposes, as it determines tax obligations and how your income gets reported to the IRS.

When workers are not employees

Those who perform household duties in someone else’s home (as a nanny or pet sitter, perhaps) are almost always considered household employees by the IRS. Understandably, many in-home caregivers tend to be household employees because of the nature of their work. If you’re caring for someone else’s loved one in their home, they will often dictate when you are needed and what type of work you should perform.

But there are exceptions. For example, if you provide cleaning and babysitting services for multiple families in their homes, but you can choose how and when you work and bring your own supplies, you would be considered self-employed instead of a household worker. And if you provide caregiving services in your own residence, such as an in-home daycare, you would also be considered self-employed. You control the relationship in these situations, meaning you are not an employee.

What are the types of household workers?

Household workers encompass a broad spectrum of roles, from full-time nannies nurturing children to occasional cleaners maintaining a home’s tidiness. Here are some typical examples of household employees:

Babysitters and nannies
Caretakers
Cleaners
Housekeepers and maids
Domestic workers (anyone who performs work in or for a private household)
Drivers
Health aides and private nurses
Yard workers and gardeners

The following are examples of people who would NOT be considered household employees:

Tutors
Private secretaries
Librarians
Independent contractors (plumbers, carpenters, etc.)

Though the above examples may work in someone’s home, they aren’t providing services of a household nature. Therefore, the IRS doesn’t consider them household employees.

Are household employees 1099 or W-2?

Household employees are typically classified as W-2 employees. As a household employee, your employer is responsible for withholding Social Security and Medicare taxes and providing you with a W-2 form at the end of the year detailing your earnings and any taxes withheld.

You will only receive a 1099-NEC form instead of a W-2 form if you are considered self-employed.

How do household employees and household employers pay taxes?

Household employee taxes are often referred to as the nanny tax. When working as a caregiver or in-home worker, your employer must issue you a W-2 form if they paid you at least $2,600 in tax year 2023. You can use this W-2 form to file your taxes come tax time.

To properly fill out your W-2 form, you must provide your employer with your Social Security number or individual taxpayer identification number (ITIN).

What is the nanny tax?

The nanny tax refers to the federal and state taxes that must be paid when hiring a household employee.

Here’s a breakdown of who pays what:

Your employer pays half of FICA taxes (Social Security and Medicare taxes) on your behalf and federal and state unemployment insurance.
You, the employee, pay the other half of FICA taxes, as well as federal income tax (and state income tax, if applicable)

Your FICA taxes will be withheld from your wages as a household employee. Household employers are not required to withhold income tax from your pay; however, you can request that they do so to make things easier for you. If you go this route, you must fill out a W-4 form, so your employer knows how much income tax to withhold.

If your employer doesn’t withhold income tax, you must make estimated quarterly tax payments to pay your income tax during the year. If you choose to e-file with us, TaxAct® can help you set up automatic estimated tax payments for the coming year through Electronic Funds Withdrawal.

What is Schedule H?

Schedule H is a tax form your employer fills out to report the household employment taxes they paid. You won’t have to worry about filing Schedule H with your income tax return as a household employee.

What tax deductions can a nanny claim?

As a nanny working as a household employee, you generally can’t deduct things like unreimbursed employee expenses. For example, if you pay for your own gas to transport the children under your care while working, you would not be able to deduct the fuel expense on your federal income tax return as you would if you were self-employed.

That being said, some states, such as California, still allow you to claim unreimbursed employee expenses as a tax deduction. However, the deduction is typically based on a percentage of your adjusted gross income (AGI) and can be very limited. Be sure to double-check your state’s tax laws so you know what you can and cannot deduct when filing.

While there aren’t nanny-specific tax deductions for household employees, you may still be able to claim other valuable tax benefits. Check out this article for a list of common tax credits and tax deductions you may be able to qualify for as an employee.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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The Ultimate Guide to Filing a Personal Tax Extension for 2023

Updated for tax year 2023.

The April 15 tax deadline is quickly approaching. If you haven’t filed your taxes yet and are starting to feel the pressure, you’re not alone. According to a recent IPX 1031 survey, one-third of Americans say they wait until the last minute to file their taxes. But if tax season snuck up on you this year, there’s no need to panic — you can always request a tax extension.

Let’s look at how to file an extension for taxes in 2024 and the implications of doing so.

What is a tax extension?

If you need more time to file your individual federal income tax return, you can request an automatic extension from the IRS using Form 4868. The filing deadline to request a tax extension is the same as filing your return, April 15, 2024.

A tax extension will give you an additional six months to file your taxes; this year’s tax extension due date is Oct. 15, 2024.

When is Tax Day in 2024?

The deadline to file taxes for 2023 and request an extension in 2024 is April 15, 2024.

When is the deadline to file a federal income tax extension in 2024?

You must file a tax extension by April 15, 2024. Note that this does not affect the date tax payments are due, just the filing deadline.

Can I still file a tax extension for 2023?

If you need more time to complete your 2023 tax return, you have until April 15, 2024, to file an extension. With an extension, you have until Oct. 15, 2024, to file your federal return.

Can you file a tax extension after Oct. 15?

No. With an extension, you must file your 2023 taxes by the October deadline. The extension deadline is typically Oct. 15 unless that date falls on a weekend or holiday. Sometimes the IRS will make exceptions for people in states that were affected by severe natural disasters.

What is the easiest way to file a tax extension?

You can electronically request an extension by filing Form 4868 with TaxAct®. We can help you estimate your tax liability and file an extension for your federal tax return. If needed, we can also help you file any state return extensions.

How much does it cost to file an extension on taxes?

Filing an extension is free. You just need to make sure you submit Form 4868 by April 15, 2024. If you’re late, you may be subject to late fees and penalties.

Will filing a tax extension give me an extension of time to pay my tax bill?

No, a tax extension only gives you more time to file your return; it doesn’t give you extra time to pay any taxes you owe. To avoid late payment penalties, you must pay your tax bill by the Tax Day deadline.

When you request a tax extension with Form 4868, you can estimate and pay your tax liability for the year. To help estimate your potential tax liability, try to complete your return as much as possible, estimating wherever necessary.

What are the pros and cons of filing a tax extension?

Filing for an extension is an excellent option for many taxpayers who feel stressed about tax season or have other commitments and need more time.

Requesting an extension from the IRS is also easy, and you don’t need to give a compelling reason why you need more time to file. So long as you submit your extension request form on time and correctly, approval is typically automatic, and you’re granted an extension.

The downside of filing a tax extension is that it only gives you more time to file, not more time to pay. As discussed in the last section, you’ll still need to estimate and pay any taxes you might owe by the tax filing deadline (April 15 this year).

Another trap many extension filers fall into is waiting too long to file. Though an extension gives you an extra six months to complete your income tax return, it’s always best to file it as soon as possible. The longer you wait, the more likely you will forget what happened during the previous tax year.

When should I file a tax extension?

The IRS doesn’t require a reason for requesting a tax extension and usually grants them without issue.

Some common reasons for filing an extension request are:

You don’t have all your tax forms and financial info yet
You have an emergency that prevents you from completing your return
You need more time to make contributions or change a retirement plan
You want to make elections on your return, but you won’t know which elections are best until later in the year

No matter your reason, if you need more time, ask for it!

When shouldn’t I file a tax extension?

Since filing for an extension only gives you more time to file but not more time to pay your taxes, you shouldn’t file an extension if you cannot pay your tax bill.

An extension won’t be helpful if you owe money you can’t pay. Instead, the IRS provides payment options and will work with you to establish a tax payment plan agreement to break up your tax bill into smaller payments over time.

If you have no tax due this year and you’re owed a refund instead, you have up to three years to file a return and claim your refund money. There is no penalty for filing a tax return late when you have no balance due, but if you’re owed a refund, make sure you file so you don’t miss out on that extra cash.

We said it before, but we’ll say it again — tax filing doesn’t get any easier as time goes on. Wait too long, and you may risk forgetting essential details about the tax year if it’s not fresh in your mind. This could mean missing out on potential deductions or tax credits.

How do I file a personal tax extension?

To request a filing extension on your personal taxes, you will need to use IRS Form 4868. TaxAct® allows you to complete Form 4868 for your federal tax return and file any necessary state extension forms when you e-file. You can also print a paper copy and send it to the IRS via snail mail.

Your extension request form requires you to provide simple information about yourself, such as your name, Social Security number, and address. If any of that information has changed since the last time you filed, notify the appropriate organizations before applying for your extension. For instance, you should notify the Social Security Administration if you change your name. If you moved recently, you should inform the IRS with Form 8822.

How do I know how much tax to pay with my extension?

To finish Form 4868, you need to estimate how much tax you owe. The form helps you calculate this by estimating your total tax liability for the year and subtracting any payments you’ve already made.

One problem many taxpayers run into is not having all their tax information yet. If you’re still waiting on important tax documents, try to complete your return as best you can. Rather than leaving something out, try to use estimates for any numbers you don’t have yet.

If you are using TaxAct to e-file a tax extension, click Mark as Estimate for any information you need to double-check before officially filing your return. You can also use our separate to help estimate your amount due.

When in doubt, it’s better to overpay than underpay. If you overestimated your tax bill and paid too much, you will receive a tax refund for the overpayment. However, you could be responsible for paying interest and penalties if you underpay. The good news is that the penalty for paying late when you’ve requested an extension is significantly less than if you did not receive an extension.

What should I do after filing a federal tax extension?

The six-month extension period is often more time than most of us need.

Here are a few steps you can follow to help keep your tax return on track:

Fill out your return as much as you can.
Keep track of the tax items you still need by making a checklist.
Keep your tax documents organized.
Finish filing your tax return as soon as you can.

What about state income tax extensions?

If you live in a state that charges income tax, you’ll need to file an extension for your state taxes and your federal taxes. In most cases, a state extension gives you more time to file, not more time to pay.

Some states will grant you an automatic six-month extension if you’ve filed for a federal tax extension, but not always. When you file with TaxAct, we make it easy for you. We walk you through completing Form 4868 for your federal return and provide you with any necessary state extension forms.

Can I file a tax extension for my business?

Yes! Sole proprietors and single-member LLCs can use the same Form 4868 for individual returns.

Business owners of partnerships, multi-member LLCs, and corporations also have the option to file a tax extension for their business, though some things work a little differently. For instance, the deadline for partnerships and S corporations to request an extension is March 15.

You can read more about this topic in our guide to business tax extensions.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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Boost Your Retirement with Your Tax Refund

Updated for tax year 2023.

If you received a tax refund this year, you may have big ideas on how to spend it. Possibly a well-deserved getaway — somewhere peaceful with no Wi-Fi access sounds nice. So does an upgrade to your home’s outdated appliances — and a little extra fun money to freshen up your closet.

But do you know what lasts much longer than all of those? Compound interest. And this is how you can use it to boost your retirement.

Whether you owe it by way of credit card debt, or enjoy its benefits through investments, you’ve likely experienced the power interest wields over time. That’s why lump sums of cash are so valuable: when invested wisely they make large imprints on your financial future.

So, if you’d like to use your refund to boost your retirement, consider these four approaches. They can add a little extra shine to your golden years.

Pay down high-interest debt

This isn’t an investment in the traditional sense; it’s an investment in you. The interest rate on your credit card is typically higher than your rate of return in the stock market — which means paying that debt down now will actually pay you more long-term. 

Max out your Roth IRA

Roth IRAs are an excellent way to stash extra cash and boost your retirement. Because you use money that’s already been taxed, that amount grows tax-free. That means when you’re ready to make withdrawals, you won’t pay compounded tax — instead, you’ll enjoy all of the growth on your original investment.

Roth IRAs also have lighter restrictions than other retirement tools. If you’re under 50 annual contributions are capped at $6,500 annually (for 2023). If you’re over 50, your annual contribution limit increases to $7,500. One of the primary selling points for Roth IRAs is you can withdraw your contribution amounts for any reason, at any time, penalty-free. In 2024, the annual contribution limit is set to increase to $7,000 ($8,000 for those 50 and older).

To contribute to a Roth IRA, your modified adjusted gross income (MAGI) must be less than $153,000 as a single filer in 2023 (rising to $161,000 in 2024). For those married filing jointly, your MAGI must be less than $228,000 in 2023 (rising to $240,000 in 2024).

Put it in an HSA

We hear it all the time: Max out your 401(k) and other traditional savings vehicles. But rarely does that conversation include your HSA — and if you have a high-deductible health plan (HDHP), it really should.

As healthcare costs rise, your HSA offers excellent tax advantages on medical costs, both now and in the future. For example, funding an HSA through your employer via pre-tax income lowers your overall federal and state tax liabilities. When you invest your refund into your HSA, those funds are tax-deductible — even if you don’t itemize.

Key benefits to investing in an HSA:

Enjoy tax-free growth in your account balance.
Take tax-free withdrawals for qualified medical expenses.
Carry your balance over annually. There’s no “use it or lose it” with an HSA.
You aren’t required to take HSA withdrawals at certain ages, like with a 401(k) or IRA.
You 100% own this money, so it follows you, not your employer.

Put it in a traditional IRA to boost your retirement

Individual Retirement Accounts (IRA) come with their own tax benefits — especially if your employer doesn’t offer a 401(k). The main difference between a traditional IRA and a Roth IRA is that the traditional version uses pre-tax funds, meaning you’ll pay some taxes when you make withdrawals. Roth IRAs use post-tax funds, so you don’t pay additional taxes when you start withdrawing money from the account. 

So, what exactly is your IRA made of? Think of your IRA as a sushi wrapper; inside you can fill it with all kinds of investments, based on your risk aversion. What are you hungry for? Choose from stocks, bonds, mutual funds, ETFs or other market tools – it’s up to you to select investments that match your appetite.

Check out our detailed income tax refund guide for more information on tax refunds, from filing your taxes to receiving the refund money.

This article is for informational purposes only and not legal or financial advice.

The post Boost Your Retirement with Your Tax Refund appeared first on TaxAct Blog.

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Your Guide to Filing a Business Tax Extension for 2023

Updated for tax year 2023.

Do you need more time to file your business return this year? No sweat — that’s what tax extensions are for. Read on to learn more about filing for a business tax return extension this year.

What is a business tax extension?

Sole proprietorships, partnerships, LLCs, and corporations can file a six-month business tax extension request with the IRS to receive extra time to complete their income tax return without penalty. Which request form you need to file depends on your business structure:

Sole proprietorships and single-member LLCs use Form 4868.
Partnerships, multi-member LLCs, and corporations use Form 7004.

Generally, the extension period is automatic if you file your request by the due date. To submit your form, you can request an extension online (TaxAct® can help you do this when you e-file with us) or submit an extension request by mail.

What is the filing deadline to request a business tax extension?

The deadline for filing a business income tax extension request also depends on what kind of business you have:

Sole proprietorship, multi-member LLCs, and corporate returns must be filed by April 15 for the 2023 tax season. The new due date of the return with an extension is Oct. 15, 2024.
Partnerships and S corporations have an earlier deadline, March 15. The new deadline with an extension is Sept. 16, 2024.

Does a business extension give me more time to pay my small business taxes?

No, filing an extension only gives you more time to complete your business tax return. You still need to pay any outstanding tax due by the April 15 deadline (March 15 for partnerships and S corporations). Failing to pay all or some of your tax liability can result in penalty and interest charges.

How do I calculate the estimated tax I need to pay?

If you’re unsure what estimated tax you owe, check out our Calculating and Paying Quarterly Estimated Taxes page for some assistance. If your tax situation hasn’t changed much, one solution is to approximate your numbers from a previous year’s return. The IRS also provides helpful calculation worksheets covering many different taxpayer scenarios. When in doubt, it is in your best interest to overpay rather than underpay to avoid being charged any interest and penalties for any unpaid tax debt. If you pay more tax than you owe, you will be able to reclaim it as a tax refund.

Are there any benefits to filing a business tax extension?

Small business owners or self-employed individuals with SEP IRAs may find it beneficial to file a business tax extension because it extends the time you have to contribute to your plan. If you’re unfamiliar, a SEP-IRA is a variation of an IRA built for sole proprietors, freelancers, or any other small business owners. If you are self-employed and have one of these funds, make any additional deposits before the Oct. 16 extended deadline. And don’t forget to update your federal tax return based on your contributions. Remember — you’re funding your account for the previous tax year, not this year.

When should I file a tax extension?

If you need more time to file for any reason — whether you are still waiting on certain tax documents, had a family emergency come up, or simply procrastinated too long — don’t hesitate to file an extension. You don’t have to convince the IRS of anything, and the extension is automatic. So, if you need more time, just ask for it!

When shouldn’t I file a business tax extension?

If you need more time to pay your taxes owed, an extension will only give you more time to file, not more time to pay. Instead, the IRS has debt relief options available for any taxpayers struggling to make tax payments. Read our article on how to set up an IRS payment installment agreement that can split up your bill into more manageable monthly payments. In certain situations, you’ll automatically qualify for an extra six months to file and do not need to request an extension. These exceptions are:

You (or your spouse) are working in a combat zone for the U.S. Armed Forces
You are a member of the military serving abroad
You are a U.S. citizen living and working outside the country
You are a U.S. citizen residing in a part of the country affected by a severe natural disaster

What information will I need to file my business extension request?

Form 7004 has been simplified and now consists of two parts:

Part I lists all the tax forms you could be requesting an extension for, along with a different code for each return. If you need to request an extension for more than one type of return, you’ll need to submit separate 7004 forms.
Part II asks for basic information about your business, such as your business structure, location, and the dates of your calendar and tax years. You’re also asked to estimate your tentative total tax and include your total payments and tax credits.

How do I file a tax extension for my business?

TaxAct makes it simple to file Form 4868 or Form 7004.

For Form 4868:

From within your TaxAct return, click Filing on the left to expand, then click File Extension.
Continue with the interview process to enter all the appropriate information.
On the screen titled Filing Extension Step – Extension Options, you will have the option to either print or e-file your federal extension only. State extensions can be printed later in the interview process.

If you have any questions or need further details on filing Form 4868 with TaxAct, read our Form 4868 help topic.

For Form 7004:

Click the Filing tab within your TaxAct return (Online or Desktop).
Under Filing, click File Extension and continue as applicable to your required filings.
The program will continue with the interview questions to help you complete the required information for an extension request.

For more detailed information about filing Form 7004, reference the IRS instructions for Form 7004.

What should I do after filing my business tax extension?

Though you now have an extra six months to file your return, please don’t put it off until the last minute! Try to complete your return as soon as possible while the last tax year is still fresh in your mind. Don’t forget to make any necessary retirement plan contributions for the previous tax year as well.

Do I need to file a business extension for my state return?

Certain states will allow an accepted federal Form 7004 or 4868 as an extension of time to file your state return, while other states require a separate extension request. TaxAct will provide information about state filing requirements during the extension interview portion of the e-filing process.

Can I also get an extension for my personal tax return?

Yes! Learn more about filing a federal individual tax return extension in this article.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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Calculate your Self-Employment Taxes
2023 Tax Return Preparation Checklist

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7 Tax Tips Military Members Need To Know

Updated for tax year 2023.

For members of the U.S. Armed Forces, there are undoubtedly a variety of unique financial challenges that come with the role. From serving overseas for extended periods and traveling for training to moving frequently and incurring uniform maintenance costs, the list of financial hurdles is quite long.

Fortunately, the IRS has designed special military tax benefits for service members to help alleviate a few of the headaches that can arise from those challenges. Here’s a look at the most common ways being a serviceman or woman can affect your taxes and responsibilities to the IRS.

1. Not all income is taxable.

If you receive combat pay, do not include it as taxable income on your tax return. Likewise, you should not pay income tax on allowances received for living and family expenses, uniforms, death expenditures, moving and travel costs, group-term life insurance, and professional education.

However, you need to pay income tax on basic compensation, such as payment for training and active duty service, bonus and incentive money, and student loan repayment from specific programs.

2. Travel and lodging expenses are deductible.

If you travel more than 100 miles and stay overnight as a National Guard member or Armed Forces reservist, you can take a tax deduction even if you do not itemize.

The IRS allows you to deduct the amount you spend for work-related travel and lodging plus 50% of the cost of your meals. But be sure not to deduct more for food and lodging expenses than the federal per diem rate for lodging and meals allows. The rates vary by state.

3. Military uniform expenses can be deductible in some states.

Prior to the Tax Cuts and Jobs Act (TCJA) in 2018, the cost of any uniforms you purchased that were unsuitable to wear off duty could be deducted with your miscellaneous itemized deductions. Uniform cleaning and maintenance were also tax deductible.

As of tax year 2023, this deduction is currently not allowed at the federal level. However, some states (like California) may still allow this deduction.

4. Tax relief is provided for extra moving expenses.

Even though the military pays for basic moving costs, it’s not unusual to incur a few moving expenses that aren’t covered. In that instance, you can deduct any non-reimbursed moving expenses on your tax return without meeting the distance or time requirements that are standard limitations for moving expense deductions.

Any extra moving expenses are deducted as adjustments to income. You don’t need to itemize to take advantage of this tax break.

5. You can keep your home residency state.

Changing state residencies if you move frequently can be a huge pain. Not only is it a hassle to file tax returns for multiple states, but you may pay more state tax in one state versus another.

Fortunately, if you move for military reasons, you can keep residency in your home state. This guideline applies to your spouse as well. If at any time you live in a state that collects income tax but holds state residency in a state that does not, generally, the new state can’t enforce the income tax.

Additionally, if income tax is withheld from your paycheck, you can file a nonresident return with that state to receive a refund.

6. More time to file your return is available.

Extra time to file your tax return may be allowed if you are stationed abroad or are in a combat zone during the tax filing season.

The IRS grants you even more time to file taxes if you serve in a combat zone. You have 180 days from either the date you return from the combat zone or from your last date of continuous hospitalization for injuries received while serving in a combat zone to file your return.

The 180 days are in addition to the number of days you had left to file when you entered the combat zone. During this extension, no interest or penalties are charged to you. If you need more time, you should file for an extension which gives you until Oct. 15 to submit your return. If Oct. 15 falls on a weekend or holiday, the due date will fall on the next business day instead.

Keep in mind that while extensions give you more time to file, any tax you owe must be paid by the regular due date of the return.

7. Some military members qualify for tax benefits in the event of death.

If the survivors of a service member who died during active duty receive a $100,000 death gratuity, that amount is tax-free.

In addition, if a service member dies while on duty in a combat zone or in support of a combat operation, the service member’s tax liabilities to the IRS are forgiven. This includes tax for the year of death and, potentially, any prior years.

This article is for informational purposes only and not legal or financial advice.

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The Improved Form W-4: How it Affects Your Tax Refund

Most employees are familiar with Form W-4, which instructs your employer on how much tax to withhold from your paycheck. This form received a major redesign at the start of 2020, making it very different from what many taxpayers were used to.

To some, the form may seem a bit overwhelming. But, in reality, it is now much more straightforward. Let’s take a look at what changed on the W-4 form from 2020 onward and what these changes mean for your income tax withholdings.

What is Form W-4?

First, let’s recap what this form is and why it’s important. Form W-4 tells your employer how much federal income tax to withhold from your paycheck every pay period. Using the information you provided when filling out the form, your employer will determine how much tax to withhold from each paycheck.

Your W-4 form has a lot of power over your taxes — if your employer withholds more income tax than you owe, you will receive a bigger tax refund when you file. If your employer doesn’t withhold enough, you might find yourself stuck with a tax bill at the end of the tax year.

On the old form, you could claim allowances on your W-4 to lower the amount of federal income tax withheld from your paychecks. As a result, many people got used to the idea that the number of allowances they claimed controlled how much income tax was taken out of their wages, allowing them to better control whether or not they received a big refund.

Why was it changed?

The Tax Cuts and Jobs Act of 2017 overhauled the nation’s federal income tax code, adjusting a system that had been in place for decades. The law got rid of personal exemptions and drastically increased the standard deduction, nearly doubling it. As of 2023, the standard deduction for single filers is $13,850 ($27,700 for joint filers). This standard deduction increase led to many more Americans electing to take the standard deduction rather than itemize their deductions, essentially removing the need for withholding allowances.

To accommodate these tax law revisions, the IRS made some significant changes to the W-4 in 2020. Today’s withholding form is arguably less confusing than its predecessor — it’s simple, straightforward, and designed to create the most accurate withholding for all employees. Ideally, this improved accuracy means your tax bill (or your tax refund amount) will be as close to zero as possible when you file your tax return.

What exactly changed on the W-4 form?

Form W-4 still requires you to provide typical identifying information, such as your name, address, Social Security number, and filing status. Beyond that, the rest of the form looks very different than any W-4 you may have filled out prior to 2020.

The withholding form went from a half page to a full page, with up to five sections for taxpayers to fill out depending on their tax situation. While a full page might seem daunting, the expansion of Form W-4 is designed to be more user-friendly and easier for taxpayers to understand.

How do I fill out my W-4 form?

When filling out your W-4 form, you only need to complete the sections that apply to you.

We’ve listed the improved five-step process (and what each section entails) below:

Personal information – This section asks you to provide your name, address, Social Security number, and filing status.
Multiple jobs – If you have more than one job OR you are a joint filer with a working spouse, you will need to fill out this section. To ensure you don’t end up with a tax bill, it’s important that you accurately estimate all additional sources of income, so your withholdings correctly align with your tax liability.
Claiming dependents – This section allows you to claim any dependents, ensuring the Child Tax Credit is deducted from your withholding. Fill out this section if you are the sole earner, or if you are married filing jointly and have the highest-paying job. If you are single with multiple jobs, you would also only need to fill out this section for your highest paying job.
Other adjustments – This section gives you more options to ensure your withholdings are accurate. If you have other income (capital gains, freelancing, interest, dividends, etc.) you can add additional withholding here to help cover those taxes. If you itemize your deductions, you can add extra deductions in this section. And if you want to add extra withholding you can choose to do that here as well.
Sign and date – And that’s it! Just add your signature and date the form to complete your W-4.

How do I change my withholding on Form W-4?

Changing your W-4 to get more money with your tax refund is easy. If you want to change your W-4 withholding amount — perhaps you favor receiving a bigger tax refund with your annual return — you can choose to do so on line 4(c) of the W-4 form.

How can I make changes to my W-4 form, and should I change my withholding?

You are allowed to update your Form W-4 at any time; just ask your HR or payroll department if you wish to do so. Many employers provide an easy way to change your W-4 online, or you can also print the form directly from the IRS website. The IRS W-4 form also provides taxpayers with a Multiple Jobs Worksheet and a Deductions Worksheet to help you calculate an accurate withholding if these circumstances apply to you.

It’s always a good idea to review and adjust your W-4 withholding after major life events that may impact your tax liability such as getting married, having a child, or receiving a big raise.

The bottom line

The improved W-4 form was designed to demystify income tax withholdings for taxpayers, but if your tax situation is particularly complex, you may benefit from checking out the IRS’s Tax Withholding Estimator. This handy tool can help you decide if you need to make any changes to your W-4 withholding.

But, if you are happy with your tax outcome, then there’s no need to change a thing.

This article is for informational purposes only and not legal or financial advice.

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Hobby Income vs. Business Income: What’s the Tax Difference?

Updated for tax year 2023.

If your hobby earns you income, the IRS wants to know about it. But how do you report hobby income and how does hobby income differ from small business income? Is one better than the other when it comes to filing taxes? Let’s take a look.

Why is it important to know the difference between hobby income and business income?

Knowing the differences between hobby income and business income is essential because it determines what kind of taxes you must pay and what deductions you can take.

What is the tax difference between hobby income and business income?

For tax purposes, the main difference between hobby income and business income is what deductions you can take. If you earn business income, you may qualify for tax deductions on qualified expenses. However, expenses for hobby income do not qualify for tax deductions.

Let’s look at the tax implications for both sources of income.

What are the tax implications for a business?

Your business income is subject to income tax, as well as a 15.3% self-employment tax (to cover Medicare and Social Security) if you’re self-employed.

To help offset your taxable income, you can take business tax deductions for qualified business expenses — like startup costs, internet and phone service, travel expenses, etc.— and possibly take a loss if your business isn’t profitable. You can report your business income and losses using Schedule C.

How is hobby income taxed?

You must also report any hobby income you receive on your federal income tax return. Hobby revenue is subject to income tax, but you won’t have to pay any self-employment tax as a hobbyist. You can report hobby income on Form 1040 (Schedule 1, line 8) under a section called “Other Income.”

If you earn hobby income from a side hustle, the IRS no longer allows you to deduct hobby-related expenses to offset your other income. This is a fairly recent change — prior to the 2018 Tax Cuts and Jobs Act, hobbyists were allowed to deduct miscellaneous expenses up to the amount of hobby income they earned. As of tax year 2023, you cannot deduct hobby expenses.

Hobby loss rules apply to small businesses classified as sole proprietorships, partnerships, and S corps. These rules do not apply to corporations, which are their own business entity.

When you use our tax prep software, TaxAct® will help you appropriately report hobby income by asking simple interview questions and matching your income to the proper tax forms.

At what point is my hobby considered a business?

Now that you know the difference, how do you know if your hobby activity is really a business or vice versa? The IRS looks at several criteria when determining whether to classify your income as a hobby or a business.

For your business to meet IRS guidelines, you should have made a profit in at least three of the last five consecutive years (there is a special exception to this rule if you breed, train, show, or race horses).

But if you’re still scratching your head trying to figure out how to report your income, consider the following questions:

Do you run your activity in a businesslike manner while keeping complete and accurate business records?
Do you put time and effort into making your activity profitable?
Do you depend upon the income for your livelihood?
Do you have personal motives (enjoyment, relaxation, etc.) for doing this activity?
Do you have enough income from other sources to fund this activity?
Are losses from this activity beyond your control or normal during the startup phase?
Have you changed your methods of operation to try to improve your profits?
Do you (or an advisor) have the knowledge and expertise necessary to make this activity a successful business?
Have you successfully made a profit from similar activities before?
Is your activity profitable during some years, and if so, how much?
Do you expect to make a profit in the future?

The IRS considers these factors on a case-by-case basis when auditing taxpayers. Typically, it all boils down to whether you intend to make a profit or whether you are doing something just for fun with no real intent to make a profit.

The IRS has classified my business as a hobby. What should I do?

When you are used to claiming business deductions on your tax return, it can be confusing and frustrating if the IRS suddenly says your business looks more like a hobby. This could happen if your business claims a net loss for too many years in a row or fails to meet other business criteria in the eyes of the IRS.

If you have a legitimate business, it’s important to keep thorough and accurate business records and save your receipts. Detailed bookkeeping of your business transactions and a written business plan can help you demonstrate a valid profit motive to the IRS if they decide to challenge your business classification.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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How Annual Bonuses Are Taxed: 7 Common Questions Answered

Updated for tax year 2023.

Everybody loves an annual bonus at the end of the year, but not everyone understands how bonuses affect their tax returns or even what the Internal Revenue Service (IRS) considers a bonus.

Let’s address some common questions about annual bonuses and what you should expect if you receive one this year.

At a glance:

The IRS considers bonuses to be supplemental income and taxes them at a flat withholding rate of 22% (a higher rate applies to bonuses over $1 million).
Your employer can tax your bonus in one of two ways — the percentage method or the aggregate method.

1. What counts as a bonus for tax purposes?

According to the IRS, a bonus is any payment made from an employer to an employee in addition to regular wages.

It can be cash or non-cash. A holiday bonus is taxable, even if it is presented as a gift.

However, if you receive a small non-cash holiday gift from your employer, such as a ham or popcorn tin, you don’t have to claim it as a bonus. The IRS specifically excludes such “de minimus fringe benefits” from taxation.

2. Why does my employer withhold more from my bonus than my regular pay?

If you’ve received an annual bonus from your employer in the past, you might have been surprised by a smaller amount than you were expecting. Because of this, you might have even wondered if your employer correctly calculated the withholding tax.

Just like overtime pay, the IRS considers bonuses to be supplemental income — basically, income that is separate from your regular pay. Supplemental wages are taxed differently, and your employer must use an IRS-approved method to determine how much tax should be withheld. Your employer can use one of the following methods:

The percentage method: Many employers choose the percentage method for its simplicity. Using this method, your employer withholds a flat 22% federal income tax rate from your bonus pay (assuming it’s under $1 million), regardless of your tax bracket. Any amount over $1 million gets hit with a bonus tax rate of 37%, and your employer has to use the percentage method if your bonus exceeds $1 million.
The aggregate method: Using this method, your employer adds your annual bonus with your regular income in one lump sum, and you’ll have taxes withheld at your normal rate, depending on your tax bracket.

Neither method is perfect, and you should always double-check your withholding for the year if you receive an annual bonus so you know what to expect at tax time. If your employer doesn’t withhold enough, you may find yourself with a tax bill. If they withhold too much, you’ll get the excess back as a tax refund.

3. Are bonuses subject to payroll taxes?

Yes, you and your employer must pay payroll taxes on bonuses, just as you do with your regular pay.

4. Could my employer have made a mistake?

Mistakes can happen. Even companies that use payroll software or services can accidentally enter the wrong information.

Most of the time, however, the tax withholding on bonuses is calculated according to IRS rules. If you have questions about the amount withheld from your bonus, the best first step is to talk to your payroll department.

5. I’m sure they withheld more tax than necessary. What can I do?

Assuming your employer calculated the bonus withholding correctly, you cannot get the withheld tax back from the IRS until you file next year’s tax return.

An easy way to even out the amount you have withheld is to file a new Form W-4. Adjusting your withholdings can reduce the amount of tax withheld from your pay for the rest of the year. Be sure to file another Form W-4 next year or whenever you need to adjust it again.

6. Is there a way to minimize taxes on my bonus?

One way to minimize the taxation of your bonus is to claim tax deductions, which reduce your taxable income. Claiming tax deductions can help you offset some of your tax liability and ultimately lead to less of your bonus amount being taxed.

7. Can getting a bonus check bump me into a higher tax bracket?

It’s possible that a bonus or a pay increase can put you in a higher tax bracket. That means you will pay a higher tax rate on each additional dollar you earn.

Some people think they may actually have less after-tax income because of a bonus, but this is not true. Being in a higher tax bracket does not change the rate you pay on everything you earn — only the rate you pay on taxable income that exceeds a certain amount.

So, even if your annual bonus bumps you into a higher tax bracket, don’t worry — you’ll still come out ahead!

This article is for informational purposes only and not legal or financial advice.

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Organize Your Way to Tax Day: 5 Steps for Success

Whether you file early or wait until the tax deadline, there are simple things you can do today to help you cruise through tax season. Use the following five tips to start getting organized.

Step 1: Know when your tax documents will arrive

Your tax forms should arrive in the mail starting in January. When the forms start to arrive, take a moment to pull out a file folder, label it, and set it somewhere safe. As new tax documents come in, add each one to your new Tax Day folder so everything you need is in one place.

Most common tax forms are sent out by late January, so if you’re missing a W-2 or 1099 in mid-February, go ahead and track it down. Having everything you need in one place sets you up for a Tax Day win.

Step 2: Review your year’s milestones

Did you get married this year? Have a baby? Buy a house or car? If you made a big life change, congratulations!

Since Uncle Sam isn’t a traditional “cool uncle,” don’t expect a gift from your registry. Instead, you might need some additional documentation and possibly extra tax forms.

For example, if you got married, check that your filing name matches what’s on your social security card. If you moved, make sure you update your address — you can do that as you file. You’ll also want to decide how you and your spouse will file this year. Your choices are married filing jointly or married filing separately.

Remember, whether you tied the knot at New Year’s brunch in January or right before the ball dropped in December, the IRS considers you married for the entire year. Make sure your information reflects that!

Step 3: Consider if you’ll itemize

A majority of taxpayers tend to take the standard deduction. However, if your itemized deductions add up to more than the standard deduction you qualify to claim, it might be a better idea to itemize.

When you file with TaxAct®, we can help you run the numbers each way to see which choice works best for you.

Here are the standard deduction rates for tax year 2023 in comparison with 2022:

Planning to itemize? Get started organizing your expense receipts from the year. An easy way to combine digital and hard copies is to snap, save, and sort them into your phone’s photo albums. That way, they’re all in one place.

Know you’ll take the standard deduction? Nice. Sit back, relax, and skip receipt gathering altogether.

Step 4: Set time aside to file

Life is hectic. And somehow, the second you sit down to do your taxes is when that chaos escalates.

Show your schedule who’s boss. Try clearing a designated block of time on your calendar to file. Go all out! Schedule a playdate for the kids, put on some motivating music, and get down to business.

By assigning that time now, you remove the “When will I prepare my taxes?!” stress from your life. And when the time rolls around, you’ll have an environment that lets you focus.

Step 5: Find a tax partner that helps you succeed

TaxAct is designed to help you hang on to more of what’s already yours. We’ll walk you through each section of your taxes, step by step, prompting you with tips for deductions and credits that you may not know about.

Best of all, our tax preparation solutions help you to prepare your taxes quickly so that you can get back to your life. Isn’t that the kind of partner you want in your corner on Tax Day?

We’re ready to help you succeed. 

Main takeaways

By addressing little things early and clearing away potential filing obstacles, when you sit down to prepare taxes in a few months there’ll be nothing standing between you and filing success — except maybe a pile of snacks. And who are we kidding? You’ll need those.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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