Here's a fun drinking game: take a shot every time image uploads break.
You're best bet is to use an external host (catbox, imgbb, etc) for images in posts, and to leave icons / bgs empty. For whatever reason, uploading images on Lemmy can be pretty buggy and this is the best solution.
Also are there size limits (in pixels or kilobytes) for image uploads?
Not AFAIK but keep it under 10 MB if you wanna be safe.