 Income tax 2022-2023. Employment taxes tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example of Form 1040 populated with LASERT tax software. You don't need tax software to follow along but it's a great tool to run scenarios with. You can also get access to the Form 1040 at the IRS website IRS.gov IRS.gov starting point. We got the single file or Mr. Anderson no employees instead of the W2 income. We've got income flowing in from a schedule C to line 8. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Let's look at that flow through by going to the schedule E in essence an income statement profit or loss from business income minus expenses gets to in essence the net income flowing into schedule one schedule one then flow into the bottom of that schedule and pulling into page one of the 1040 online number eight. We also have the self employment tax which is calculated on page two of the form 1040 not the federal income tax but the self employment tax that is being calculated by the schedule C scrolling down the net income in essence on the schedule C pulling into the schedule S E self employment tax schedule which then calculates the tax in this case the 14129 which is pulling over to the 1040 page number two. Also if I go to the first page we're going to have then half of that employment tax deducted as an adjustment to income on line 10. So we can see that as the schedule C net income flowing through to the schedule S E calculating the self employment tax taking half of that tax 7065 pulling that on over to the schedule one page number two there's the 7065 pulling into the form 1040 page number one line number 10 that gets us to the adjusted gross income then we have the standard deduction which is standard 12950 for the single filer and we have the qualified business deduction which is based on once again the schedule C we may talk about that more later calculated that with the software 15997 that gets us to the taxable income 63988 page two calculating the tax federal income tax 9692 in this case plus the self employment tax 14129 we've said would paid 30 000 in that gets us to the 6179 okay that's the general scenario a lot going on with the basic schedule C here now we want to think about the the employment taxes we've got the employment tax situation let's go to the schedule C we want to make sure that we have a distinction between the employment taxes and the self employment tax and there's similarities between the two the structure will be similar in nature but they are different right so because if I talk about the self employment tax remember that we have the 120 000 minus the 20 000 that gets us to the 100 000 the IRS is basically charging us payroll taxes social security and medicare with the self employment tax here when I talk about the employment taxes I'm talking about the taxes that we're going to be paying as we have employees ourselves that we are paying and therefore we're going to have to deal with their taxes that we're going to be paying for them so just to keep that distinct in our mind because they're similar in nature you might think if I was a w2 I'm sorry if I was going to be subject to self employment taxes in my own business and I didn't have any employees why wouldn't they just force me they could you can think of them as forcing me to give myself a w2 that's one way they could have done it and that's what they basically do if you set up like a an s corporation for example then you have to issue yourself a w2 with reasonable wages and that's and that w2 income you would be paying your portion of the social security and then the corporation would be paying their portion of social security and medicare and so on and then you would get the deduction you know as an expense on the income statement would be the general idea but it would be easier with the schedule see if we just take the net income which is what they do and they basically said I'm going to treat you as though you kind of got w2 income but it's just net income we're not going to make you give a w2 income we're just going to assume all the income you have should be subject to payroll taxes or the equivalent of them social self employment tax so now we've got the the 100 000 which is going to be subject to the self employment tax as we saw in a prior presentation it being in essence the employee and the employer portion of the social security and medicare half of that then being deductible trying to mirror what would be happening if it wasn't employee employer situation for a corporation so then if you if you hire other people then then you're going to have then you're going to have a deduction for the wages that you're going to be paying right here right and you're also could have taxes that are going to be the taxes that are for the payroll taxes that you're paying in that instance now note that even though you're working for your business we're not going to be generally paying ourselves w2 wages we're going to only be dealing with w2 wages dealing with the payroll stuff if we hire other people we'll be able to deduct the wages and the payroll taxes and then we're our net income just like normal will be subject then to the self employment tax which is kind of like our payroll taxes that we will have to be paying on our own wages after deducting basically everything else would be the general idea now dealing if you're if you're in a situation where you do like uh where you're doing taxes for other people note that if they have like a schedule c type of business then it's pretty straightforward if they just give you an income statement which is properly accounting for the wages and the taxes that they paid but oftentimes we get into bookkeeping kind of situations and and problems and that's the question you want to be picking up if you're dealing if you're doing multiple taxes for multiple people how much of the bookkeeping situation do you want to get into and when they ask questions about payroll do you do you want to like get into those kind of questions as well or do you want to have other resources human resources so that they can go to to answer those types of questions so for example when when people are thinking about growing their business they may have questions about should i hire employees versus contractors versus hiring or bringing on partners into the business if they hire uh employees then they have to process payroll just like you would for any other business and you've got to deal with that whole payroll situation which is a specialty in and of itself just because of the complexities with the withholdings and everything related to the payroll if you hire them as a contractor you got to make sure that you're not they are actual contractors in nature so that so that if the iris comes after you and says and tries to audit whether they're employees or contractors doctors contractors you can justify them as being contractors and not employees and you have a little bit less control over contractors and then if you hire them as a a equity partner meaning you're going to split some of the revenue with them in some way now you're no longer a schedule c sole proprietorship in that case you would have to file a partnership return or possibly set up some other entity like an LLC or an S corporation or something possibly a flow through entity which would still flow through to your tax return here but that avid adds a level of complexity and obviously if you bring on partners now every big decision that you have needs to be going through a committee which is difficult for small business you might think multiple minds always come up with a better answer diversity is important diversity adds two things but if diversity is done like wrong like like where people can't where there's gridlock then then it will be detrimental right if you if you get into that committee kind of situation and you can't make a decision or move forward that often happens with small businesses so you got to structure your growth in such a way that it'll be beneficial and so that's an issue that comes up and then if they decide on picking up payroll uh having employees the next question is how do I process the payroll so if you're doing accounting do you want to help them process the payroll as a bookkeeper or something like that possibly using software like a quick books or something do you want to have a third party provider that that we can help to process the payroll and note that if you're thinking about hiring someone and trying to process payroll you might want to get advice from someone who isn't actually offering payroll to just get advice on who you should get payroll from should I do it through my bookkeeping system should I get it through like a quick books or something like that or should I go through a third party provider and then get some answers on the payroll payroll is one of those things you want to get right the first time because it gets a because if it gets messed up then it's it's come becomes a little bit more difficult to fix the problem then try to get it right you know like the first time is the is the general idea with it so notice that when you pay the payroll taxes you're you're going to be paying social security and medicare again like when you deal with payroll taxes in a similar fashion as you see social security and medicare over here on your self-employment tax which can get confusing but when you when you're dealing with payroll taxes note that you're actually paying the social security and medicare you're part of the social security and medicare and you're withholding the employees part of social security and medicare on their income their income being an expense to you notice that we're deducting wages here it's an expense to us but we're also paying payroll taxes our portion of it based on their income not our income not the hundred thousand down here but their income right so that's what that's the difference between social security and medicare that will be dealing with payroll taxes when it's on our employees it's based on their income which is an expense to us when we're calculating the self-employment tax it'll be based on in this example the one hundred thousand based on our net income when we deal with the employees and we withhold federal income tax we're withholding their federal income tax based on their income so that we can pay their taxes whereas our federal income tax is going to be calculated on this net income of the schedule c after the expenses which is then on page two of the form 1040 this is our federal income tax that's being calculated and this is our portion of the payroll taxes or similar to which is the self-employment tax social security and medicare social security medicare medicaid their federal income tax will be based on their wages and to us that's just that's just an expense of wages expense to us and then the social security taxes will be that on their wages part of that will be basically the payroll taxes now notice that when you when you just populate if you're just populating the schedule c if everything's if everything's given to you like an income statement it's quite easy but you might want to go a little step further and just double check that the wages number here ties out to what's on the w2 and the w3 forms the 941s and the 940 form to see that everything ties up because the iris has the w2s the w3s the 940s and the uh the 941s so you would expect that the wages here should should all match out or else the iris could you know come up with questions something would seem wrong so that's one of the double checks that you can kind of do when you're doing the data input you could say okay give me your if you have payroll give me give me your payroll reports your w2s your w3s and whatnot and we could just at least see if you're if your wages tie out to what's on you know what would you would expect from those uh payroll reports so that's the general distinction with uh with employees obviously when you're dealing with a sole proprietorship you would only have that complexity if they had employees if they have no employees then you'd still be dealing with the self-employment tax but not with the whole payroll thing and the payroll thing in general if you want to research on payroll it's it's going to be in essence the same no matter the entity that you're choosing except for the fact that if you go from a sole proprietorship to like an s corporation you might have to set up and pay yourself oh you're true self in that instance but the actual processing of payroll is pretty much the the you know the same process no matter the entity sole proprietor s corporation llc corporation