 Income tax 2021-2022 tax software example. Self-employment SE tax. Get ready to get refunds to the max. Diving into income tax 2021-2022. Lizard tax software. You don't need tax software to follow along, but you might want the Form 1040, which you can find on the IRS website at irs.gov, irs.gov, starting point single filer Adam Smith, living in Beverly Hills 90210. We're gonna start out this time with a 100,000 coming from the Schedule C. Let's first see it just flow through here to the first page of the 1040. That's gonna be on the Schedule C. Profit and loss. This is basically an income statement for the business. 120 minus the 20 gives us the net in essence, net income in essence on an income statement. The Schedule C flowing through then to Schedule 1. So we have Schedule 1, the 100,000 line number three. And that then totals up here, flows into page one of the Form 1040, so the net income from the Schedule C in essence here on line number eight. Then we also have the tax that is calculated. This is where our focus will be. We have two taxes we need to consider, the federal income tax, and now we're also responsible for the self-employment tax, which is kind of like the equivalent of the payroll taxes, the social security and Medicare. So that's calculated on the Schedule SE. This is where our focus will be. But just to see the flow through here, you can see the total lines up to the 14129. That pulls into the Form 1040 page number two and this other tax area, in addition to the income tax, which is the 9,900. Also, we get half of that tax as a deduction. So if I jump back on over then to the first page, we've got this adjustment here on line number 10. That comes from Schedule I, line number two. And so there is the deduction that we're taking place of the 7065, half of the self-employment tax. If I go back then to the 1040, that gets us down to the 92935 for the adjusted gross income, standard deduction 12,550 instead of the itemized deductions. Then we have the qualified business income deduction. I'm gonna let the software calculate it. For now, we might dive into that more detail in a future presentation and that's gonna get us into the taxable income of the 64308. Now, a lot of stuff going on here, obviously. This time we're focused on the self-employment tax. Let's just try to mirror this as it is at this point in our Excel worksheet. So if we're gonna mirror the starting point, we have the 100,000. This is coming not from the W2 income this time, but from a Schedule C. We might recalculate the income statement, 100,000 minus 20. If I was to do that in practice, I would have a more complex kind of statement if I was helping out with the bookkeeping and that's gonna give us the 100,000. Pulls through to the first page of the 1040 and then we have the other tax, the self-employment tax that we're gonna have to take into consideration and we put that in the other taxes over here. So we said that was in the additional taxes. Now, we just put one line item depending on the software to calculate it. We might do a recalculation in Excel so we can get a little bit more detail of how this number comes about so we can explain it a bit more in this presentation. But that pulls over to page one down here and the additional taxes, then we took half of that is deductible as an above-the-line deduction or adjustment to income. So that's in this adjustment here. We're basically, this is not the adjustment that's in this one. There's the seven. We basically took half of that amount. You can see the formula. We pulled it over and divided it by two and that then is gonna go here. That's gonna be our adjusted gross income and that lines up to what's on the tax return. Page one, adjusted gross income, 92935, 92935. And then we've got the standard deduction. We've got the 1677 qualified business income deduction which at this point, we're just gonna depend on the software to help us out. We might look into that more detail in a future presentation to get us to the 64309. So there's the 64309 depending on the software to calculate the income tax, 9900. So this is the federal income tax and then adding that to the self-employment tax gets us to the 2429 and that's gonna match out what we have here. So that's gonna be basically our starting point. Now our focus here is on the self-employment tax. So what is the self-employment tax? If we go then to the schedule C, note that it's basically mirroring income tax in like a normal corporation type of setup to the income of the owner of the sole proprietorship. So in other words, if I have 120,000 up here, if I had employees, then I would have deductions down here related to the payments that we made to the employees, including their withholdings, which would be an expense and the deduction for our portion of payroll taxes, social security and Medicare and possibly federal unemployment but that doesn't apply here. So that's what those things would be, would be something that we would be able to deduct for our employees on the schedule C if we were paying our employees. But the IRS also sees us as the employee of our own business. So that means that they wanna charge us self-employment tax. So in other words, if I took this 100,000 down here and just said that pull that into the form 1040 and just basically paid the income, federal income taxes on it, that would mean that owning a business would mean that I would not be subject to as many taxes as if I was a W-2 employee because that income is not subject to payroll taxes in essence, which is social security and Medicare. So they're basically gonna say, okay, I'm gonna take that net income, not the gross income, the net of your schedule C business and treat you as basically the owner of your own business as well as the employee of their own business because we're gonna charge you both the employer and employee portion in essence of the payroll taxes, social security and Medicare, and that's where the self-employment tax comes in. So again, you could have both payroll taxes because you're paying employees and you have to withhold their payroll taxes when you pay them and then you would have to then report your payroll taxes, employee and employee portion of social security and Medicare in this case. And we also have to take our net income and calculate in essence our payroll taxes, which we are now the employer and employee of our own business is basically what we're being treated as. And that's gonna be done on the schedule SE. So we saw it calculated here, we'll go through the calculation in a second, but that comes out to in essence to 14-129. Now, then you might say, well, wait a second, the business gets to the corporation, if I was to have my own payroll, if I was paying someone else, I get the deduction for the employee wages, which includes their portion of the payroll taxes, and I get to deduct my portion of the payroll taxes as an expense. So that's the justification for getting half of it as a deduction. You might say, well, why don't I get that deduction then on the schedule SE, which is where I would typically get it when I pay payroll taxes. I would have the payroll taxes for my employees here as a deduction here. Well, we can't have it here when you're calculating the tax on the 100,000 because it would end up in a circle reference. And that's why we take that half of the deduction and we put it up here on schedule one. So it gets kind of messy in that case because they're trying to mirror what's happening on the corporate side to what's on the schedule SE side of things. So that's the general scenario. So now let's go to the calculation for the schedule for the self-employment. Just to see, okay, what is this calculating at? Just a brief look at it. You can go through the schedule in more detail, obviously here, but we see the 100,000, that in essence net income from the schedule SE. And then we see here that we're gonna take, if line three is more than zero, multiply line three by a 92.35 or 0.9235, otherwise enter amount from line three. So we're multiplying it by this fraction of an amount here. And then in essence, I'm gonna jump down here because there is a social security cap that we have to deal with as well at the 142.8. But in essence, let's jump down here and say, now we're gonna take that amount for the social security and multiply it times the 0.124. Now the 0.124, you might know from payroll taxes that you pay payroll taxes of 6.2%. So 0.1 or 12.4% would be twice that. That's why I say you're paying, you're being charged basically the employee and employee or portion. In other words, pulling out the trustee calculator, if we took the 92350 times the 0.124, that's where we're gonna get the 11451. Now if this was payroll taxes and you earned 92350 from as an employee, it would be times 0.062, half of that. So it's doubled what you would be as an employee because it's the employee or portion in essence. The same with the Medicare. So if I take this amount of the 92350 times the 0.029, that's where we're getting the 2,678. You can see the Medicare is much smaller because that's basically a safety net program as opposed to social security, more and more is becoming like a federal retirement program which is kind of weird. But in any case, if you have the 92350 and you were an employee, it would be 0.0145. So you would have that amount. So it's double that because you're like the employee and employee or portion, 0.0145 times two. I'm sorry, hold on a second. 0.0145 times two being the 0.029. And obviously those two added together gets us to the payroll taxes of 14.129 which is of course significant amount of taxes, most of it being the social security and then half of that is being deducted. So let's go ahead and see if we can mirror that calculation over here in our worksheet so we can maybe explain it to ourselves a little bit better. We might truncate it a little bit but shorten it a little bit that that is. But let's go to the additional taxes. I'm gonna start by giving myself a little bit more room with these totals. I'm gonna move these to the outside in case I need a few more columns over here. And then I'm gonna start with self employment income. And that's gonna be just the schedule C net income at this point. So you could have multiple schedule C's or something. I'm gonna take the net income from schedule C and I'm gonna multiply by rate. And so the rate that they multiply by in our little formula over here is gonna be the 0.9235, 0.923, 0.9235. Let's see some decimals there, home tab, numbers, decimalized it. And then we're gonna go to the font group. That's not actually a word, I know. I know it's not. I know it's not. Multiply this so self, self. So let's call this ADJ self, self employment income. And so we'll multiply that out. And so we'll say this is gonna be equal to the 100,000 times that number. So there we have that. And then we've got the social security cap, social security income cap. So the social security is capped at, it's capped at the 142.8, 142.8. So I know I'm doing this kind of quick, but just get an idea, 142.8. So now we're gonna take the greater of to calculate social security, either this number or this number. I believe I have this right. This might be a truncated format, but we'll see what we have here. We're gonna say then social security income then is the greater or the lesser, the lesser I should say of these two. We'll do a logic test to do that. And good old if then formula. If this number is less than this number then, that's a comma with the then, I want you to take the small, that number, the one we calculated. But if not, that's a comma. If not, then I want you to take the cap. And there it is. So if this number turned out to be something higher, like this was 200,000, then we'd be capped out at the 142. And the cap is there because over this amount, you don't get any benefits and it's kind of like a retirement plan type of thing instead of a safety net. So you can argue about the cap and whether it's good or not good or whatnot, but that's the way it is at this point. So then I'm gonna add a couple more rows, adding, insert a couple more rows. So let's then take that times the social security rate, which is twice the rate that you'd see in your W-2. So it's 0.062 times two, 6.2% times two, because you're like the employee and employer, let's make it a percent. So it's 12.4. And then I'll give that, that's gonna be the social security tax, self-employment part of the social security. Let's say this is gonna be equal to, let's just do it all in one column here. This is gonna be equal to this times this. So there's the social security portion. Then did I get that right, 11.451? I did, of course I did. Why am I even checking? I know I got it right. I know I got it right. So this is gonna be, this is gonna be Medicare, let's call it Medicare wages, which doesn't have a cap now. This is where it gets a little confusing because if it goes over that cap, we don't have a cap here. So this is gonna be equal to the 142.8. And no, not, this is gonna be the 92.350, even if it goes over the cap. And then we've got the Medicare rate, which is gonna be the equal to the 0.0145. That's what you might be used to, 1.5%, 1.45%, if in your W2 wages times two, because it's the employee and employer portion, let's make it a percent, add some decimals, that's 2.9, and underline it, is that what we have over here? Just to double check that, 2.9, it is, of course it is. Why are you even questioning, I know. So this is gonna be the Medicare tax, which is gonna be equal to the 92.350 times the 2.9. There we have that. So the self-employment tax then, we'll bring it out, bring it out to the outside, is gonna be equal to the social security and Medicare. I probably did a lot of misspelling. I probably offended people with my spelling who are yelling at the screen, alternative, alternative. I did a pretty good job. I did a good job. Well, they're all small words. Employment, it's a pretty big word. Anyways, so I'm gonna move this back on over, my total's on over. Let's just delete this whole column and recalculate it. Delete, I'll sum it up over here. Equals to some day. And then this one, we're gonna say, early withdrawal penalty. I'll just make that blue in case we need it. I just got one column there. And then we'll sum it up for the additional taxes, which I might have to then add to my formula. So there it is. Why isn't it formatted like it should be? Let's do a formatting of it, 14.130, pulling over to page one, but it's not going to you as I totally messed up and I deleted the formula. Oh my goodness, what did I do? What did I do? I know what I did. Hold on a second, I'll fix it. Over here on the itemized deductions are off because and the adjustments to income, this is where it's off because this needs to be equal to the self-employment needs to be the additional taxes of the 14.130 divided by two. And I deleted that cell. So that's gonna fix like a lot of it. So then I go back on over, a lot of it's back and then this one's the one I expected to be off because I deleted the cell. So this is just gonna be equal to the additional taxes, the additional taxes, which are here. And so I think we're okay now. Are we okay? Let's see, let's check it out. Let's go back to, so we got the total tax, 14.129. So that's the 14.129, 130, it's off by a dollar. I'm okay with that. And then 10.40 page one is still at 64.308. So we're at the 64.308 page number two. We've got the 9.900 and the 14.129 to get to the 24.29. So there's the 24.30, so it looks good, I think. Okay, so there we have it, we can kind of reconstruct it. Now, if our income goes high, let's see if our income goes up and I go into my schedule C and let's say that we have the income line item of 220,000. So now we're gonna hit the cap on that social security. So if I go back on over, I'm gonna say, okay. So now we've got the 200,000 that pulled over here, but if I go to the schedule SE, we're at the, that comes out to the 184.7 and then it's cap for social security at 142.8. And so let's try to see, this might be easier to see in our Excel worksheet, which is why we built it. And so we might have a more simplified calculation, but it's more transparent here oftentimes. So notice now, if I change this schedule C income to 220,000, that brings us to 200,000 net income, pulls over to the additional tax. So now we got the 200,000 times the 0.9235, that's 148.7, which is the adjusted income, that's more than the 142.8 on the cap. So we're only paying social security on the 142.8, but a cap at the 12.4, that gives us the 17707. But the Medicare is still at the full amount because there is no cap and that's gonna give us the 2.9% and there might even be an additional Medicare tax that we'd have to deal with above a threshold as well. Did I hit that threshold? I hope not, cause I don't really want to deal with it. But we get to then 2363, so there's our 2363. So there's our 2363. So that pulls over, then do the page over here. So there's our 2363. So if we see how that whole thing washes through, let's say we've got our schedule C totals out at the 200,000, it flows through then to page one, our schedule one, here's the 200,000, that flows through to the 1040. Here's the 1040 with the 200,000. Then we've got the self-employment tax calculated at with the cap involved, the 2363, that's on page two of the 1040, 1040 page number two, the 2363, and we get half of that deducted on the above the line deductions, which is gonna be on schedule one, page two, 11, 532 in this case, that 11, 532 pulls to page one of the 1040. There's the 11, 532 bringing the adjusted gross income to 188468, got a little backwards there, that happens sometimes backwards. I do the moonwalk with the numbers 188468. And so then we've got the 12, 550, and then we've got the qualified income deduction. I'll let the computer calculate this for now, 29388. We'll focus on that possibly later, 29388. That gives us the 146530. So we got the 146530, page two, relying on the software to do the tax calculation, 29188. So we've got the 29188 and the self-employment, I'm sorry, the self-employment tax to get us to the 52252, so 52252. So you can see kind of a lot's going on there. Now the other thing you gotta kind of keep aware of is you might say, well, what would happen if I had other things subject to like self-employment tax? So like what if I basically had wages of another, like what if I had wages of 50,000? So now I would have to pay, my wages would have withhold self-employment of the 3,300 for social security, which is my employee portion, but I already went over the cap. So that causes problems, right? So if I go back on over and say, okay, what happened with that? You could see the self-employment tax has been basically adjusted here to the 17175. So if I go to self-employment and take a look at the calculation, we've got the 200,000 that we made from the schedule C that hadn't changed. The 184.7 is what would generally be subject to the self-employment tax, but then here, we've got the total social security wages and tips from W2 in essence at the 50,000, which is already subject to social security and Medicare, but only on the employee portion. And that reduces the amount down to the 9,200, which is good because instead of us having to pay the two, I mean, instead of us having to pay employee and employee or portion, we basically only paid the 6.2% instead of a double, the 12.4% for the social security side of that, as well as on the Medicare side of it, we're only gonna be paying the 1.45 instead of the 2.9. So you could see then that's where the adjustment, so they took that out to the 90,28, and then we multiply that times the 11.507. So you could see if you have multiple things that are subject to the self-employment tax, it gets kind of confusing in terms of what the calculation is gonna be, the software will of course help with that, but you wanna be able to kind of explain it and just note that it gives you kind of the better calculation, I believe, because it's gonna say that we're gonna say that the W2 income is gonna be where we're gonna take the first kind of calculation from, which is only gonna be the employee half instead of allocating it to the self-employment tax, which again has to both the employee or an employee portion kind of in essence. So you could see how that gets a little bit more messy with the calculation as well. Also note that we have the added Medicare tax, I believe on this one too, which is on if I go to page two of the schedule two, then we've got the Medicare tax and that's calculated on form 8959. So if I go to 8959, you've got the additional Medicare tax calculation that is bringing down at that 0.009 if you go over the certain threshold. So these self-employment tax, the social security and Medicare in general are usually more of a flat kind of tax and therefore generally easier than the federal income tax. Even though the federal income tax kind of seems easy because we let the software do the calculation, but when you try to do projections and whatnot on with the federal income tax because it's a progressive tax system, it's quite complicated. But the social security and Medicare gets quite complicated as well because they're trying to apply kind of some standardization over many different entities that have different tax structures and then they keep on tweaking the law with regards to a cap on it, for example, and then more, every time they add a new kind of progressive component, it complicates the system and every time we try to add that more complication across multiple different entities, it causes more complications and obviously those complications kind of build on themselves. So even if you have multiple things subject to self-employment tax, it gets more complicated. If you have W-2 income and other income, it gets more complicated. And of course, as your income goes up and you hit those upper limit caps, then that complicates things as well.