 Income tax 2023-2024. Self-employed, what you need to know. Get ready and some coffee, because if you try telling an IRS auditor a joke about taxes, they won't depreciate it. Most of this information comes from Publication 334, Tax Guide for Small Business for Individuals Who Use Schedule C Tax Year 2023, which you could find on the IRS website at irs.gov, irs.gov. Looking at the individual income tax formula, mirroring the calculation on the form 1040. Remembering the first half of the income tax formula is in essence an income statement. Income statements typically having income minus expenses resulting in net income. Here having income minus various deductions resulting in taxable income. Business income reported on the Schedule C, it's going to flow into line one income of our income tax formula, which is a little deceiving because the Schedule C itself is an income statement having business income minus business expenses, otherwise known as business deductions. The net income in essence on the Schedule C flowing into line one income of our income tax formula. Here's the first page of the form 1040 where the income would flow through to line number eight additional income. First a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our CPA six pack shirts a must have for any pool or beach time mixing money with muscle always sure to attract attention. Yeah, even if you're not a CPA you need this shirt so you can like pull in that iconic CPA six pack stomach muscle vibe man. You know that CPA six pack everyone envisions in their mind when they think CPA. Yeah, as a CPA I actually and unusually don't have tremendous abs. However, I was blessed with a whole lot of belly hair. Yeah, allowing me to sculpt the hair into a nice CPA six pack like shape, which is highly attractive. Yeah, maybe the shirt will help you generate some belly hair too. And if it does, make sure to let me know. Maybe I'll try wearing it on my head. And yes, I know six pack isn't spelled right, but three letters is more efficient than four so I trimmed it down a bit. Okay, it's an improvement. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here's the schedule one additional income and adjustments to income where the schedule C would flow into line three business income or loss which would come from the schedule C. Here is the schedule C profit or loss from business which looks like an income statement having income minus the expenses. Okay, so let's get into what you need to know about federal taxes. So I know what I need to know about self employment. Bosses are no fun. I don't like bosses. That's all I need to know. Okay, we have to we have some other stuff for tax related self employment schedule C businesses we need to know as well, including note. The following is a list of questions you may need to answer so you can fill out your federal income tax return. So this will kind of go and coincide with some of the presentations that we will be building, which of course are coming from and designed around this publication. So the chapters are given to help you find the related discussion in this publication. So questions that will commonly come to mind that the IRS is trying to put out in front of us when we're thinking about being a business, a sole proprietor, possibly reporting our income on a schedule C remembering this is very difficult for most people, especially if we are starting as a W2 employee and moving then to a self employed situation. Because for taxes, the government has kind of trained us almost intentionally not to think about taxes. So it's also almost like a passive activity for us at this time, if we've mainly been working as a W2 employee, why? Because the employer is the one that the government has leverage over and can basically say, hey, look, employer, if you want a deduction for your employees, we want you to not only report to us with a W2 form and to the employee how much they have earned so we can make sure to double check and go after their income tax that they report on the form 1040. But we also want you to withhold the money and hopefully withhold too much money so that we can try to aim for a refund. And therefore, most people think of kind of like it's almost like the employer is the bad guy that's taking your money. And then the government is the good guy because they give you a return of your money because they over withheld because that's how the system is kind of set up. When we move from having an employer to being self-employed, it's quite common for us to just not take care of the tax obligations because we're not used to doing that. In that case, we're going to have to make our own estimated payments and make sure that we're paying as we earn the money, which is difficult because we don't know how much money we're even going to earn because it's a new business possibly. And then we have to actually make the payments and then we have more complexities with regards to tax return calculation because we have to make basically an income statement. If we don't do those things, the IRS could have the income side due to 1099s that are reported to them, but won't have the expense side due to the fact they don't have all the expenses that we needed to consume to generate the revenue, which could really get people behind and messed up on taxes. Okay, so what kinds of federal taxes do I have to pay? That's going to be one of the questions that we come up to. Obviously, for federal income taxes, we have a federal income tax system, but we also have Social Security and Medicare that we saw is a significant factor that can come in with regards to self-employment tax. So that's huge. What forms must I file? So now if I'm a sole proprietor, we have typical questions in terms of business entities. Is it a separate business entity? This kind of leads you into questions as to whether or not you want to be a sole proprietor reported on a Schedule C versus a flow-through entity like an S corporation or even a C corporation or an LLC. Now, as a tax preparer, remember, you have to kind of get an idea of where you want to be put in your time, what kind of returns do you want to be specializing in, and what kind of network might you want to be involved with for other services that you can basically recommend for other things, being very careful on those other recommended services because you always have people that are going to basically be selling certain things. They focus on a very specific thing, like they make S corporations, right? We just make S corporations. Well, that means that if they're a hammer, everything's a nail. Everything needs to be an S corporation if you are an S corporation maker. So as a tax preparer or a general practitioner, then sometimes people might come to you for those kind of questions about things like, should I have a separate entity? Is it worth it? So it could be and it could not be, but questions come up in terms of where you're going to fit in and what's your business model going to look like with that kind of advice. So what must I do if I have employees? So note that if I'm self-employed, that means that if I'm reporting on a Schedule C, that's the type of business entity that I am. But I still am going to run my business as though it's separate from my personal self. I have a separate set of books and part of that separate set of business running might include that I have employees. So the fact that I have employees doesn't mean that I can't still report like a fairly basic and simple Schedule C reporting as opposed to having a separate tax return for a C corporation or an S corporation or an LLC. However, I do have to deal with payroll. So payroll is a whole nother world in and of itself that you have to deal with in a specialized area. If you're a tax preparer, questions come up in terms of what are you going to be your bookkeeping help and resources? Do you want to help with the bookkeeping, have that part of your firm or what not? Do you want to be networking with other bookkeepers? And then payroll is a crucial part of bookkeeping as businesses get larger, not only being like a sole proprietor that works themselves for like gig work or something, but possibly having a larger business where of course they deal with employees and then there's going to be questions with regards to payroll. Where are you going to fit in in advising or working or helping with those processes if you're working in like tax or financial sectors? Do I have to start my tax year in January or I can start it in any other month? Now this is an interesting question because if we think about a calendar year, obviously 12 months, January to December, but you can imagine situations where a business might want a different year that they're going to be running by the most common reason for that would be that you have a busy season that lands somewhere other than on December and therefore maybe you want your year in to coincide somehow with your busy season. It also could help for tax preparation purposes because then you're not focusing on all the year-end stuff possibly at the most busy time just from a business perspective. So for small businesses, schedule C businesses, most of the time we're using a calendar year business and so on, but you might come up with these questions of course which would be could we use a fiscal year other than possibly a calendar year? What method could I use to account for my income and expenses? So this is another kind of bookkeeping problem because the common two methods of accounting as we will see cash method and accrual method when we talk about taxes for individual reporting like schedule A for example itemized deductions and so on, usually we're on some kind of modified cash basis. In other words cash basis unless the tax code says otherwise because they're trying to stop us from manipulating the cash based method by manipulating when the payments are happening, for example. With a business we usually think of an accrual method. If you have an accounting background you're going to say large corporations use an accrual method. Why? Because the accrual method is actually more accurate although less more difficult to regulate because now you have to come up with rules based on the accrual method as opposed to the cash method. So for a small business it would be easier usually to use a cash method but sometimes you have to use an accrual method and sometimes you might want to use an accrual method. This is a question that usually comes up when people start a new business because once they start the business there's usually consistency they have to have going forward or it becomes more difficult to change. So that's a question that comes up often times for a new business. What must I do if I dispose of a business property during the year? So dispositions become issues because now we have possibly depreciable assets for example and then we've got to deal with depreciation possibly which could be an issue depending on how large the business is and what type of industry they are in which could mean that we buy and sell a business property for example and if we sell equipment or something like that we have to deal with the depreciation related to it and the calculation of the gain or loss and whether or not it should be capital or ordinary income in nature and so on. What kinds of business income do I have to report on my tax return? So when we think about the business's return meaning the schedule C we usually have an income statement, income and expenses. Questions with regards to income for taxes come to one is it something that needs to be included in income where the IRS's position is basically everything that you receive typically should be included in income unless the IRS says otherwise and then two what kind of things should be reported where? Where should they be reported as income in other words on the schedule C versus some other location on the tax return noting of course we would like to have income that is exempt from reporting income being bad for taxes right we would like to have income that we don't have to report right legally if that were possible. What kinds of business expenses can I deduct on my tax return? Usually this is a more complex question usually the business income is usually fairly straightforward with the business income people sometimes have questions about whether or not they get a 1099 the question is going to be well nobody 1099 to me for that income do I still have to report it well yeah you typically have to record it because it was business income so the IRS is going to try to get the person that paid you to issue a 1099 but if you're a hair salon and you just do people's hair and you get paid by individual people and not businesses you're probably not going to get a 1099 do you still have to record the income yes you just don't have that double verification for the IRS's side of things on the expenses it sometimes gets more difficult because with a business what we do is we do what we do well and we pay for everything else therefore we're going to have a much larger list of expenses typically in terms of category types then income and questions will then of course come up should we have business what kind of business expenses are there and we have to also be thinking about separating our business expenses from personal so that when we're paying for stuff we can determine is this something that's ordinary and necessary for the business or is it personal we come up with questions that are questionable in terms of their board for their both like a home you might have a home office or like a car which you use for personal and business for example so what kinds of expenses are not deductible as business expenses so just as important when we think about expenses what kind of things can we deduct and we can also think about those things which we cannot deduct right and so we can list those out what happens if I have a business loss can I deduct it remember that the IRS wants to be your silent partner if you start a hot dog stand the even if it was a bad hot dog it was an illegal hot dog stands you didn't get the proper authority you've been selling hot dogs that are moldy they're old they're not up to snuff but you still made money the IRS wants their cut of that is the general idea just like they want their cut of Al Capone's money even though Al Capone wasn't doing up onboard stuff right so that's the general idea but if you lose money if your hot dog stand loses money the IRS doesn't want a piece of that right they don't want to pay you for the loss that you sustained on their behalf as part of their partnership because what could you do you could take that loss and write it off against other income that you had like W2 income or possibly some other forms of income investment or something like that and the IRS doesn't is less likely to want to do that now you might be able to do that right so you might be able to say if I had a loss I might be able to take that loss against other income but you can you can imagine that the IRS is going to be skeptical of that because they want a piece of your earnings your winnings not of your losses right so that means that you're going to want to make sure that you have the justification that you have a business intention and so on and so forth if you're in a situation where you have losses which isn't a problem because many businesses do have losses when they start out I've run I mean I've my business started at a loss or it right before that's typical in order to in order to get things up and up and running until hopefully you have income in the future which you would think should be a legitimate deduction somewhere because the initial investment was needed to generate revenue it's just the revenue didn't happen until the future and so in any case we got that question what are my rights as a taxpayer so we can go into the taxpayer rights you know you've got the the Constitution and the Bill of Rights and we're not talking we're talking about the taxpayer rights in this case and obviously if it's a government entity you would think some rights would include things like transparency like due process proper communication and that kind of thing where do I go if I need help with the federal tax matters business meal expenses now meal expenses has always been kind of an issue with taxes because it's one of those things that you could consider is it business or is it personal we always imagine those you know people that are going out for lavish dinners and whatnot and then try to write it off on the taxes and so on and so forth so there was a temporary 100% deduction for business meal expense and it's has expired now so this business meal deduction reverts back to the previous 50% allowable deduction beginning January 1st 2023 so we're back to what most people if you've worked in taxes are familiar with which is that like 50% of it is deductible you've got this whole question of is it is it travel or is it meals and if it's meals is it personal or is it business and then if we get to deduct it we get the 50% deduction instead of the 100% deduction so there's that we get will possibly dive into that more detail later see meals and lodging later for more information