 Income tax 2022-2023, business expenses, pension plans, tax software example, let's do some wealth preservation with some tax preparation. 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 than 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. Here we are in our example, 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 related forms and schedules at the IRS website, irs.gov, irs.gov. Starting point we got the single filer Mr. Anderson living in Beverly Hills 90210. No W-2 income because we've got the Schedule C income. Let's look at the flow-throughs from that that comes from the Schedule C which is the profit or loss from business income statement format income minus expenses to net then rolling into Schedule 1 which rolls into the Form 1040 line number 8. We also have self-employment tax we have to deal with which goes from the Schedule C bottom line net income into the Schedule SE self-employment tax calculating Social Security Medicare self-employment tax 14129. In this case going to the first page or second page of the Form 1040 I should say there is that item. Then half of that's deductible on the first page as an above the line deduction right there and adjustment to income. We could see that flow-through coming from the Schedule C net income flow into the Schedule SE to calculate the self-employment tax half of that then flow into Schedule 2. And I'm sorry Schedule 1 page 2 there it is that flows to the 1040 page number one. So we got the 100,000 minus the 7,065 gives us the 92,935 then we got the 12,950 standard deduction and then we have the qualified business income deduction calculated by the software to get us to the 63,988. If we go to page number two tax calculated at the 9692 we've got that added to the self-employment tax 14129 gives us the 23821 we're going to imagine we paid in 30,000 for a difference of that 6179. All right we're focused in on however the Schedule C over here and we're thinking now about putting money into a some type of retirement plan. Now oftentimes the thought process for a small business is something like this. If you have like a sole proprietorship and it's your business you're thinking all right if I if I was an employee in an employee employer situation I might have access to a 401k plan which is one of the biggest benefits you know you can get as an employee and that would allow me to put money in and get a tax benefit when I put it in and possibly have some matching. So I don't have that over here with the Schedule C. I could put money then into an IRA but I'm limited on how much money I can put into an IRA. So then maybe I think about maybe I could set up my own like 401k plan but the 401k plan is too complex to manage and it's costly to manage. So maybe I set up a simpler format with the same kind of goal of putting more money away than I could put into an IRA like a simple or a set. That's usually the thought process but then of course if you have employees you can also think about what what benefits could I give to my employees to maximize their benefits that I'm paying to them as well. And then what is one of the requirements so that I can maximize my amount I could put into like a set and also deal with the fact that I'm going to I'm going to have to do some kind of similar situation for employees if I have the employees. All right so let's just think about those scenarios just to see where they kind of fall in the tax software and the similarities and differences. Now if you were a W2 employee it would look something like this right if I went if I let's just imagine we had a W2 if you had a 401k plan in a W2 type of thing. Then let's say let's say like your wages were 50,000 and then your federal income tax is whatever it is 5000 let's say and then your social security and so on and so forth. And then in box 12 I believe it's going to be you'll have the amount that you put in to say a 401k if you're another kind of employee like working for the government or 403b or whatever and let's say it was 10,000. So that what that would indicate then is this box and wages up here is not including the 10,000 that you put into the 401k. In other words box one of the W2 may be lower than I think box six or the Medicare wages box because whatever the Medicare wages boxes and that's how you can kind of see that your actual wages was higher. You deducted it already from the federal income tax income number on the W2 and so when it flows through then to the form 1040 that 50,000 is actually short by 10,000. You already got the deduction right it already got reduced because it never hit the return in terms of federal income taxes because it was taken out on the W2 by the employer. Okay, so what if now let's compare that to like okay now I'm a sole proprietor. I don't have that so I don't have any capacity to put in there and reduce my wages. I'm still paying wages on my schedule see down here kind of like income shouldn't I get like a benefit of some kind well if you don't have any any plan set up you can still put money into an IRA. So that works in a similar fashion because if I go over here instead of reducing the income line. It's going to be an above the line deduction going to be an above the line deduction, not an itemized deduction so you can think of that as like an adjustment to income. In a similar way as just reducing income itself which is what we do on the W2 in essence. So for example it's going to be on schedule one and then we're going to say page number two. We've got the good old IRA the trusty IRA now the great thing about an IRA is that you could you can actually wait until you complete your taxes and then before you file as long as it's before the original due date. You can try to say how much could I maximize my IRA for so software will usually allow you this is the last kind of tax plan and you can do oftentimes I'm going to send me to maximize my amount that I can put into an IRA by putting a one there. And that's 6000 in this case which is great but it's still pretty low if I don't have a lot of cash flow that might be all all I can put into an IRA and I and that's fine. Then I'm then that's great because I can't I couldn't utilize any more that if I had more capacity to put more money in I don't get the matching and everything but I get I get to put money in in a similar fashion up to up to 6000. The problem is 6000 is a low limit compared to how much you could put into a 401k or often a step and stuff so that's where it comes in so that lower that is going to be involved here so now your AGI has been adjusted. So that's great but if the cash flow gets to the point where you like I could put I could I could have put way more into my 401k plan. So I should be able to put more in to my IRA than 6000 because I'm starting to I'm starting to rock and roll over here. I'm getting I'm earning like good money and I need to put it somewhere and I want to get some tax break on it. Well what can I do to get higher than the IRA. Well I could maybe say well do my own 401k plan but that's quite burdensome to do because the administration work is difficult. So is there an easier kind of plan for small people like me so I can put more money into my plan and give a benefit to my employees for putting money into the plan. Now if you have employees that you're putting money in there the money that they that that is related to the employees generally would think would be a deductible item here on the schedule. See but the amount of money that we're putting in to a sep or simple that's related to us and if we're possibly a sole proprietor with no employees then that might be all we have right. Then it would that part generally isn't here on the schedule see that's going to be over here on once again the schedule one page number two. So instead of the IRA we're looking sep or simple these as the names indicate here at least a simple are a lot easier to set up then a 401k plan or something like that. They're not quite as easy as an IRA just your individual IRA but they're still pretty pretty easy to set up so the goal then would be which two of these is the best for me. Now these are often going to be limited I'm not going to go into a lot of detail on them here but you want to basically compare and contrast between your options to set up a plan to maximize your benefits and your current and planned future employee benefits would be the general idea and one of the things that is nice is to look for a plan that you could possibly once again look into after after the tax year is over because oftentimes I don't know how much money I can put in to my sep or simple until I do my tax return and know how much money I have and then that's going to set the limits or help me to set the limits so I can try to maximize the money I put into my retirement so that's what that's a great. Advantage that you want to you know consider when you're in a business when you're doing a small business oftentimes so if I jump to these items. And let's just check these out like if I go to my if I go to my self employment sep and let's say I maximize the sep then I'm going to go back on over and so that's currently at the 18587 now that's going to be contingent to some degree on my income level meaning if my income was higher let's put this let's add like another hundred thousand here and go back on over now we're at 34642 so you see what I mean it's contingent on your income so you kind of have to do the taxes to see how much you can maximize in although you can possibly get a pretty good estimate and a lot of people will of course be limited by cash flow a lot of people aren't going to have $37,000 to put into the to put into the set but if you're doing quite if your business is going well you may well have the money to put in and and so it's nice to be able to do that calculation so you can try to maximize the amount that you could put in there so then this is going to add up once again to the 49 434 pull into the form 1040 right and you'd have a similar process for a simple so if I jump over here and I do the simple and I try to maximize the simple instead of the sep boom you can use the software to kind of kind of play around with it so you can see substantial difference right so you want to be comparing and contrasting the pros and cons and those pros and cons will differ a lot if you have employee ease because you want and so what are your objectives are your objectives mainly to to maximize how much you could put into the the retirement plan to get a benefit similar to what you could had like in a 401k plan or something like that going exceeding the $6000 limit or cap in an IRA or is your goal more towards you have a lot of employees that you're trying to maximize your payroll to them which is of course also a benefit to you as well because the more that you can you can pay them the more that you can pay them and have that money go further the more benefit you're able you're able to give them so if you can give them a tax break that's also saving you money it's saving you as a as a whole the team more more money so so it so it depends on where your circumstances there are in terms of how many employees you have how well you're able to kind of estimate what your income will be what your cash flow is to see if you can maximize out the total dollar limits and what you're projecting to happen in the future with regards to those those terms as well so so once again that the general idea would be oftentimes what happens is people go from a W to employee they start a schedule C and then they realize they don't have a 401k plan here they want to put money away you can put money into an IRA which is similar to a 401k but there's a low threshold limit to put the money in and then you go into these options about ok maybe we should set up some kind of retirement plan so I can put more money into it and then then you want to dive into more research and think what's the best option for my particular situation and always when you do research on these more complex types of things you probably want to talk to someone who is not being paid directly for setting the thing up because oftentimes lawyers and accountants and whatnot like to set up complicated things just for the sake of complication because they get paid for complicated things right so you so if it's complicated doesn't mean it's necessarily good you know so you want to kind of figure out which is so you might want to pay someone in other words just for advice comparing and contrasting and then then look to pay someone to set it up manage it and and so on but it's usually a pretty easy process if you choose one of those like a simple or step type of system but just make sure you know how the how the employees work and fit within your requirements to facilitate it