 Most of this information comes from the tax guide for small business, for individuals who use Schedule C, Publication 334, Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused online, one that being income, remembering that the first half of the income tax formula is in essence an income statement, although a strange one. We also want to note that this is basically a skeleton format that we can easily visualize and a lot of other information would be feeding into it from other forms and schedules. This basically representing the first page of the Form 1040, where we have an income statement type format starting with the income section. Then we have the adjustments to income, which you could call above the line deductions, similar to expenses, if it was an income statement terminology, it gets us to the subtotal of adjusted gross income, AGI, and important subtotal, because when we look at phase outs, for example, as income levels rise of credits and of deductions, they're usually based on this subtotal, adjusted gross income, AGI, rather than the income line. Then we have the greater of the standard deduction or itemized deductions. You could think of these as similar to expenses. Again, we're gonna take the greater of these two. You could call these the below the line deductions. Is tax deductible. Gets us to the taxable income, which is in essence equivalent to net income in a normal type of income statement. Everything's flipped on its head where we want the taxable income to be as low as possible, as opposed to normal income statements and normal situations where we want the net income to be as high as possible. That means we would like to be able to exclude income if possible, if legally possible, up top, and we would like to have our deductions which are kind of similar to expenses as high as possible. Now note we're back up here on the income line when we're thinking about the formula with regards to what's being reflected on page one of the form 1040. However, we're gonna feed into that now the business income and the business income is gonna come from another schedule, the typical schedule and the one we're focused on here is for small businesses, that being the schedule C. Now the schedule C is gonna be a whole nother income statement and an income statement that is much more what we're used to seeing in terms of an income statement. In other words, we're gonna have a schedule C which will have income from the business, expenses from the business, the expenses are still in essence deductions, but they're kind of normal and natural deductions that we would expect from an income tax system. In other words, if you have an income tax system, you would expect that the deductions would be those things that you needed to consume in order to generate revenue so that you tax people on the net income not on their gross income. If you tax people on their gross income, then you're gonna be favoring some industries versus other industries and the one industries that need more investment, more expenditures in order to generate the revenue are gonna be disincentivized, right? So that's the general idea and that actually makes good sense when we think about the schedule C. So it's the net income from the schedule C that flows into the income line on the form 1040. So that's a little bit confusing because this income line then already is including a bunch of expenses when pulling in something from a schedule C type of business because you're pulling in the bottom line of an income statement, which was the income minus the expenses, the expenses being the business deductions. Now, when you don't have business income, the other income on this top line usually comes from like W2 income. And the idea with the W2 income is we don't have those other kinds of expenses because the employer is thought to be the one that's going to be laying out those types of expenditures. Therefore, most of these deductions on the actual form 1040, the adjustments to income and the itemized deductions aren't really like natural expenses that we would think of for an income tax type of system. There are expenses that are trying to change our behavior or incentivize certain things, stimulate the economy, whatever they're trying to do. But actually the schedule C is more straightforward in that the expenses that are there makes sense to us from a normal kind of income statement or tax income tax type of system. But the net income is going to flow into this formula. It's the bottom line. So when we're looking at then the first page of the form 1040, we're focused here on other income from schedule one. This is where the schedule C is flowing into the first page of the 1040, which we can kind of visualize in this formula format. And this number then that's flowing in from the schedule C is the net income, which has already been decreased by the business deductions. Now that came from the schedule C where we had income of 120 minus expenses, which you can't see here was 20,000. The net income is what pulled into the first page of the form 1040 on the income section of the form 1040. Okay, are you self-employed? Answer, you are a self-employed person if you carry on a trade or business as a sole proprietor or an independent contractor. Usually this is a fairly straightforward situation, but there are areas where it can be less straightforward and people often have questions as to whether they're self-employed or not and what the tax consequences would then be. Let's first take a step back and think about the IRS's perspective with regards to your revenue. From the IRS's perspective, anything that we receive should be basically classified as revenue unless the IRS code has exempted it from income. And remember that reporting it as income is bad for taxes because that means in an income tax system we're gonna be paying tax on it. Now the IRS has a perspective to kind of look over everybody's shoulder to try to determine if people are reporting their income or not. And if you think about most transactions you have a payer of the transaction and then you have the recipient in the transaction. So someone has income and the other one has a deduction. From the tax perspective, the deduction is good and the income is bad. Everything's flipped on its head, right? So in, for example, an employee-employer situation which most of us have been in at some point or another, we might have W2 income that we're receiving from the employee-er. The IRS actually has leverage on the employee-er in that situation to give the IRS information about the person that they're paying. Why? Because the employee-er wants to get a deduction for the wages that they're paying to the employee. The employee-e has an incentive not to report their income, they should report their income, but that's where the IRS is gonna be skeptical that the employee-e is not gonna report their income. So they basically force the pay-er in that situation, the employee-er, to give the W2 not only to the employee-e but also to the government so that the government knows how much the employee-e paid earned and they force the employee-er to be the government's tax collector taking the money out of the paycheck before the employee-e even receives it. So you can see how the situation is gonna work there. Now, if you are self-employed type of situation, the government doesn't have the same kind of leverage in an employee-e employee-er situation, although they still could have some leverage because if you're a sole proprietor that's working for another business instead of individuals, then that business still wants to take a business deduction. Although you're not an employee-e, you still are getting paid. And so the IRS can say, hey, look, if you want that expense to the person that's paying you as a sole proprietor, we want you to tell us the money that you're paying, not with a W2, we won't force you to take the withholdings, but with a form 1099. So if you're a sole proprietor, then you might get these 1099 forms, which would indicate that you would have to report as income. But remember, the fact that we got a W2 form or a 1099 form does not necessarily mean that we would have to record income or not record income. Those are just gonna be informational forms. The IRS is kind of trying to look over our shoulders. And oftentimes because of those informational forms, because of the intrusive nature of the IRS trying to get more and more information about people's revenue, we start to think that we don't have to record income unless we get a form like a 1099 or a W2. And that's the kind of what I'm trying to drive at here. That shouldn't be the thing that tells us whether or not we have to report income or not. That's the thing that the IRS is using to double check that we report income. So for example, if you're in a type of business where you're not working for another business, you're working for the end consumer, an individual, like someone that is a hair salon or a massage parlor or a restaurant. Now you're dealing with people that don't have business expenses. So they're not gonna issue you a 1099 because the IRS is not pressuring the individual. The IRS has no leverage over someone getting their haircut.