 Income tax 2023-2024. Employment taxes, tax software example. Get ready and some coffee because we're setting our refund to the max with income tax preparation 2023-2024. 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 crunching numbers is my cardio product line. Now, I'm not saying that subscribing to this channel, crunching numbers with us will make you thin, fit, and healthy or anything. However, it does seem like it works for her, just saying. So, you know, subscribe, hit the bell thing and buy some merchandise so you can make the world a better place by sharing your accounting instruction exercise routine. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our form, 1040 example problems using LASERT tax software. You don't need tax software to follow along, but if you have access to it, it's a great tool to run scenarios with. You can also get access to forms, schedules, instructions at the IRS website, irs.gov, irs.gov, standard starting point, Adam Taxman. Just trying to avoid a dang Taxman living in Beverly Hills 90210 single filer, no dependence. We're going to start off with W-2 income, which we will shortly change to Schedule C sole proprietorship income 100,000. We've got the 13,850 standard deduction getting to the taxable income 86,150, which we can mirror in our income tax formula. 100,000 minus the 13,850 gets us to the 86,150. The calculation of the tax 14266 calculated by the software page number two 14266. Okay, let's go back to the page number one. We're now going to be focusing in on converting from W-2 income to Schedule C income. Now thinking about what if we have employees. This can be a little bit of a confusing topic because of the confusion between the self-employment taxes and the payroll taxes, both of them being social security and Medicare. However, the self-employment tax is going to be based on our self-employment income, typically the bottom line of the Schedule C. Whereas the payroll taxes are something that we have to process. If we have to process payroll, which for a Schedule C kind of business will only happen if we hire other people. So let's give a general recap of this. If I go to the first tab here and if we were a W-2 employee, you will recall that we will have wages. And then let's imagine that we were the employee of a separate legal entity like a C corporation, a normal type of corporation. Then they would be responsible for withholding for us the 6200, which is 6.2% of the wages for the social security, the 1.45 for the Medicare, and the withholding for federal income taxes that would be reported on the W-2. Remember that they would also have to be reporting their half of it paying 6200 in this case on their side that wouldn't be reported on our W-2 because in theory doesn't come out of our paycheck but rather is paid on their side and the 1,450 on their side. Now if we convert this to a Schedule C as we saw before when we focused on the self-employment, let's do that now. I'm going to say delete and say okay and we're going to go back and then say to do income on the Schedule C. And let's just do the same scenario we did last time, 120,000 income. We have the expenses of 20,000. So now we get to deduct the expenses but we know that on the Schedule C now we have the 120 minus the 20 gives us to that 100,000 again. So in this case remember that for us we don't have just the federal income taxes that we now have to calculate because the government wants to say no you also have to pay us the social security and Medicare. Well I don't have any employees. Government says well you are the employee of the business. That's how we're going to treat you as both the employee and the employer. Therefore as we saw last time this 100,000 is what's pulling into the schedule SE where we calculate both the employee and employer portion. The 14192 reported on page 2 as another tax and then half of that is deductible. So I won't go into that in detail because we saw it last time but on page 2 there's the added tax that we have to actually include on the Form 1040 there's our income tax up top. So let's go back to the Schedule C. Now remember that that doesn't mean that we don't have employees ourselves. So what if we wanted to hire employees? Well then we have to deal with payroll just like anyone else would basically have to deal with payroll. The only difference here being that in our case we're not going to be putting ourselves on the payroll as a W2 employee as would be the case if you were like a CEO or a high level executive at a corporation. In that case everybody is an employee because it's a separate legal entity and the owners are the shareholders. So anyone that works for the business would basically get a W2 in that case and deal with payroll. In our case we're only going to deal with payroll if we hire other people and in which case we have to be processing the payroll for them and still result in an income statement resulting in net income. And the net income is what we're going to have to be paying the our portion of self-employment tax which is kind of like the payroll taxes that we're basically paying to us as we're considered like the executives of the sole proprietorship as well as the owner. So we're paying both employee and employer portion is the general idea. So that means with general payroll remember the idea here with payroll. If you're a tax preparer the question is do you want to be taking on business tax returns at all if because they're much more complex. And if you do do you want to restrict the types of tax returns that you have to like simple schedule sees to a particular industry or so on and so forth. And then do you want to be focusing in on just one type of business entity such as a schedule see versus flow through entities like S corporations and LLCs or even take on C corporations partnerships and how complex do you want to be dealing with. Now the other question as well is it used to be that CPA firms and accounting firms did taxes bookkeeping and payroll but a lot of these have become specialty areas in and of themselves. So are we someone that wants to be taking on the bookkeeping as well as the payroll as well as the taxes or possibly we just want to do the taxes and network with other people to process the payroll which might be a bookkeeper using software to help them with payroll which will be an added cost to the client no matter what payroll is always going to be an added cost because it's become quite complex or and or do we want to have a bookkeeper that we network with or bookkeepers that we network with and payroll providers that we network with who specialize just in payroll because oftentimes the CPA firms for example oftentimes are going more towards tax preparation and tax planning as well as audit because there's higher profit margins and the bookkeeping and the payroll although there's money to be made there is becoming more specialized so it's more difficult to be a generalist and take all of those things on so sometimes you have some kind of some type of networking system that's going to be put in place. So just a quick overview on the payroll note that what payroll involves is that you're going to have to be dealing with the payroll when you hire someone. The question is going to be if I need help can I hire them as a contractor or do I have to do payroll do I have to process them as payroll. If you are going to be dealing with our day to day activities the IRS is going to lean towards wanting them to be an employee employee or relationship to force you to have to process payroll so that you're responsible for doing the withholdings and all that kind of stuff. If you want to hire them as a contractor you want to make sure that you delineate why they're a contractor and why you don't have to include them as an employee and therefore don't have to issue them a W2 and withhold and so on and so forth. So if they are an employee then you determine how often you want to pay them weekly, semi-weekly, bi-weekly or monthly for example and then every quarter typically depending on how much wages you have to report the 941 so then you have to deal with the reporting of the 941s which are going to basically summarize in a similar way as the form 1040 summarizes the federal income taxes for the year. The 941s summarize the payroll taxes which include the Social Security federal income taxes for the employees not yours for the business not for your 1040 but for the employees and the Medicare. It summarizes that on a quarterly basis would be the general idea and then at the end of the year you also have the 940 which is going to be summarizing the FUTA which is the employee or only tax that you're going to basically have to deal with. And then of course you have to process the W2s and the W3s providing those not only to the employees but also to the government so that you can basically so you have to process those as well. Now that becomes a significant amount of work you're going to end up paying for that or the client will no matter what happens right so one way to happen is they might have their software like a QuickBooks for example that could help them to generate these forms but the QuickBooks software will of course add an added fee for processing the payroll so you're going to pay for possibly through the software but you could get some support with that many other popular softwares have some kind of internal or add on that can help to process the payroll. And then you also might say well I'm going to try to have someone external do the payroll working with external payroll providers which might be like an ADP or a paychecks these are just the large ones there's many of them but they are going to specialize just in payroll. And these guys could integrate with software or possibly you try to keep the bookkeeper separate and have the bookkeeper basically on a cashed based system using like bank feeds for example and you also have clients using a third party payroll provider that you trust. And then when they give us the information for the tax preparation we can gather all this information together including the bookkeeping which gives us the income statement so that we can put that into the schedule C. The ADP reports including the 941s the 940 and the W2s which we can use to make any adjusting entries that are period and adjusting entries so if you want to again this gets into technical stuff how much bookkeeping and adjusting entries do we want to take on. But the idea is going to be that these reports that the W2s and the 941s are going to be reported to the government as well as your federal income tax returns so you should then have you should be able to reconcile exactly what is reported in terms of wages on like the W2 to what you reported as a deduction on the tax return. If you have something vastly different reported as wages on the tax return then was reported on the quarterly 941s and the yearly 940 and W2, W3 then you can see the IRS might question that of course so you want to kind of reconcile make sure that those things are reconciled. The other thing to keep in mind here when we report things here the wages area includes typically the taxes paid by the employee so in other words if we compare this to like the W2 this W3 represents like all W2s as if all of your employees if you had five employees. The W3 would kind of represent as if all employees were one employee box one being all the wages for federal income taxes reported to all five employees on one W3 right. So you've got the wages and then the federal income taxes would be all of the taxes that were paid. These federal income taxes although you took them as the employer from your employee by not paying them to the employee withholding them and then paying them to the government. These are not payroll taxes reported from a bookkeeping standpoint on our side really because the idea is that they are part of wages. They are part of the earnings of the employee we just had to allocate their earnings to the government on their behalf. Same with Social Security the Social Security that's reported on the W2s and W3 is not our Social Security. They're not payroll taxes to us. We just are the ones that had to pay that money on behalf of the employees we took it from the employees and paid it directly to the government on their behalf. Now we had to pay our portion of the Social Security and Medicare which we can see on the 941s the difference between the 941 to the 940. Our portion which matches meaning if we double the Social Security and Medicare typically then that's what we had to pay over and above. So that's what we paid in terms of payroll taxes. So when you're trying to match this stuff up to what was reported on the tax return what you should have here you would think then is wages that basically tie into the 941s and 940 which gets a little bit tricky when you get into like things that are deductible for federal income taxes like 401k plans and that kind of stuff. But in essence total wages are going to be here you also are going to have reports if you have ADP or paychecks that kind of breaks this stuff out too that might be useful. But then you would expect then the taxes to be payroll taxes which would just be the employer payroll taxes which would be our portion of Social Security, Medicare and the FUTA federal unemployment tax which is kind of our portion. So you can kind of check those so if we went back into our data input we would expect if we had employees to have something in the wages let's say the wages were $12,000 and then let's say the payroll taxes were $3,000. If I saw that on the W-2s and I was on the income statement that I then put into the tax return again I might want to ask for the 941s and the 940s if I want to be thorough and see does that tie into the wages that were paid to the employees. Does this tie into the employer portion of the payroll taxes because again if not then the IRS has that information and if the two things don't coincide 941s, W-2s and what is reported here you could see that could cause a problem of course. Notice that we still result in net income of $85,000 here because and that means that our we didn't pay ourselves in this case as we would if we were an executor of a corporation like a C corporation or even a flow through entity like an S corporation we might end up paying ourselves. In this case we don't the net income is calculated still as self-employment tax which now again of course we would then be reporting on the schedule SE now we're down to $85,000 which we will then calculate as if it was our income similar to the self and to wages where we're going to pay social security Medicare both the employer and employee portion and of course we're going to pay the federal income taxes which is what we usually think of calculating on the form 1040.