 Income tax 2022-2023, reporting self-employment tax, SE tax, tax software example, let's do some wealth preservation with some tax preparation. 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, single-filer, Mr. Anderson living in Beverly Hills 90210, no W-2 income, instead we have the business income down below. Let's take a look at the flow-throughs of the business income, which come from the Schedule C, profit or loss from a business, and that is an income statement format, income minus expenses, the net income then in essence flowing from the Schedule C to the Schedule 1, and then it flows into the Form 1040, the Form 1040, there it is. We know that they also have to deal with the self-employment tax, which is our point of focus this time. That flows from the Schedule C, net income, then to the Schedule SE self-employment tax, calculating social security and Medicare equivalent in essence to the payroll tax for the sole proprietor at, in this case, 14129, which flows into the Schedule 2, the 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. There it is here, which flows into the Form 1040, page number two, and there's the 14129. We get half of that as a deduction on page one of the Form 1040. We can see here, just to note that flow through, that goes from the Schedule C of course. Once again, the 100,000 flow into the Schedule SE, calculate the self-employment tax, social security and Medicare, half of that then, 7065 in this case, flows into Schedule 1, page number two, which flows into the Form 1040, and here we have it here. So now we've got the 100,000 minus the 7065 gives us the 92,935 AGI minus the standard deduction we're taking in this case is 12,950. We're letting the worksheet calculate the Qualified Business Income deduction 15997 to get down to the 63,988 taxable income. Page two, calculating the tax, federal income tax, 9,692. The self-employment tax, 14129 for total tax, 23821, 30,000. We are imagining estimated tax payments gets us to 6,179. We're going to mirror that over here on our Excel worksheet in a formula basis. So we've got the 100,000 that's flowing in from Schedule C, which is in essence just an income statement. Noting in practice, you might do a whole nother worksheet for Schedule C to look at adjustments to income. There's a whole nother course or section on that if you want to dive into building a worksheet to help you do the data input. But in essence, we've got the net income that's flowing in here. Then we have the adjustments to income. Let's focus first down here, the other taxes. The other taxes we put in another sheet similar to what we would see on the tax return, other credits and taxes, where we have the other taxes here, which is the 14129. That flows in here. We also have the 7,065, which is half of that, which is coming from this sheet, adjustment to income, half the self-employment tax. That gets us to the 936, the standard deduction 12,950. Then we pulled in the qualified business income deduction calculated from the tax software to get the 63989, which should match the 63989 we saw over here. And then we have the tax calculated from the software at 9692. 9692, there's the 14, and there's the 30,000 that we made for estimated payments to get to the bottom line of 6179. So that's the outline. All right, so we're focused on the self-employment tax. So you'll recall, then if I go to the schedule C, if I had employees, then I would be dealing with payroll taxes. And if I had payroll taxes, then I would have to deal with social security and Medicare that I would have to withhold from my employees. And I would also have to pay my portion of social security Medicare based on their income and expense to me, payroll expense, right? I have to calculate my portion. In this case, however, we're talking about self-employment tax for sole proprietorship. We don't, in this case, issue ourselves a schedule C because we're not a separate entity. Instead, we're just going to take the net income in essence from the schedule C and then calculate the self-employment tax. It's similar to a situation where we're an employee of another company in that we have to pay both the employer and employee side of it. So in other words, if you were an employee and you made 100,000 versus if you made 100,000 on the schedule C, you would be better off from a taxes on social security and Medicare to be an employee because you would only be withholding your portion half of the social security and Medicare, whereas here you're going to be treated as though you are both the employer and employee, at least for the most part, paying for the most part like twice as much. But remember that it's also still beneficial to be a sole proprietor sometimes because you might have expenses that you can write off that you can't write off if you're a W-2 employee and you have more flexibility in that kind of stuff too. So that's the general idea. So the net income then rolls into the schedule S-E. So we can see it right here, the 100,000. And then it multiplies at times as 0.9235 for the standard method that we would use. And so it's actually recording the tax not on the full 100%, but on the 0.9235% in essence. And then we calculate down here the social security and Medicare portions on it. That's how we get to that 14129, which is the tax, the 7,000, then being half of that as the deduction. Let's try to mirror that over in our Excel worksheet just so we can understand this calculation and possibly work on making an Excel worksheet that you can kind of use to double-check it and get a better understanding of it. So I'm going to go back on over here. I'm going to go back to my self-employment worksheet and see if we can just put something together. It's not going to be perfect, but it could possibly help us to get an idea of the calculation. So I'm going to make this skinny over here and I'm going to do the self-employment tax. Self-employment tax. And so boom, let's do that. Let's make this black and white maybe. Black and white. And then I'm going to pull in the self-employment income, which oftentimes you would think would come from the Schedule C. So I'm going to have to adjust this as I go here. I'm just going to kind of, I'm going to bring this in from the Schedule C, which is the 100,000. That's going to be our starting point. And then you can see here it takes that 100,000 and basically multiplies it times the point 9,235. So if line dot dot, point 9,235. So I'm going to do that. I'm going to say, okay, let's say times percent, let's just say times, times percent percent of what did I say? I said, I said 92.35%. Point 9,235. Let's make that a percent by going to the home tab number percent to find it. And there we go. And then I'm going to underline it here and then we'll get self-employment income subject to tax or something like that. My subtotals may not be the best name, but we're going to say we got the 92. Now it could get a little bit tricky because if I had a loss, then we're not going to have any self-employment tax. So I could say I might want to put a more tricky formula in here in the event of a loss, but let's leave it at this for now and we'll get into that later. And so then we've got the 92 and then we've got the maximum for the Social Security and Medicare. So notice that 0.062 is usually what you pay for Social Security if it was a sole proprietor. We're going to double that to the Social Security rate we pay here, which is the 12.4. And then we double the 0.0145 to the 2.9. That's what I mean by we pay the both the employer and employee portion. But before I do that, we also have the cap of the threshold for the Social Security. So this would be the wages as long as it's under the threshold. Now I've got to break out the Social Security and Medicare to some degree because they're treated differently with regards to this cap. So let's start out this way. Let's say this was Social Security and let's say this is Medicare. And then I'm going to I'm going to say this is going to be the income subject subject to tax income subject to tax before before cap. And then let's say that the cap for Social Security is I'll put that here for reference 147,000 147,000. So if I go over that number, then I'm not going to have any more Social Security past that number. I'm going to make these two black and white, black, white and centered. The black didn't show up white and centered. So there we go. And then I'm going to say, okay, so for the Social Security, it's got to be it's let's let's actually pull this over here. And I'm going to say it needs to be the lesser of these two numbers for Social Security. So I'm going to say this is I can use a men function. So equals the men, the men, give me the smaller of these two numbers. You can also use an if number if this number is bigger than that number, but the men isn't an easier calculation. And for this one, I'm just going to pick up the one the this number because there's no cap. Although there could be an added Medicare calculation, which we might get into or might not be able to get into here. So I don't want to get too detailed on it. So there we go. So there's the there's our amount. And then we're going to multiply it by the rates. So rates, let's say the rates for Social Security Social Security card. Remember, it would have been if you look at your W2, it would be 0.062. If you were an employee, but we're going to double that times two. I'm going to make that a percent home tab number group percentified, add some decimals 12.4. This one's going to be if it would be 0.0145 for an individual W2 employee. But I'm going to multiply it times two because you're like the employer and employee portion. So they hit you on both sides with that one. So there we have it. There's our percents. So then I can say, so then I can say the tax is going to be equal to this times this. And this will be equal to this times this. And then I can equals the sum of these two. And this will be like the total for our simple, our simple calculation. So I'm going to say this is the total. Let's make this black and white and centered. And we could see that that's going to be the total here. And so that looks good. So now I'm going to move this cell reference because this is where the cell reference is coming from. Well, let's just do it this way. Let's say, let's go to my first page and say that this number needs to be coming from other taxes. Other taxes. I'm just going to pick up this one for now. So it pulls up the proper number. And for my adjustments, I'm going to say this equals then my taxes. Other taxes. This one divided by two. And so there we have it. So other taxes. So this 14 130. And we're off by dollar. That's okay. I'm cool with that. All right. So that's the general idea. All right. So now we could have a situation. What if there was a loss? If there was a loss, we wouldn't have any self-employment tax, right? So I could go back on over here and say, okay, what if we had a loss? You could say this was 130,000. Now I'm going to go back on over and go, okay. Schedule C has a loss of 10,000. There is no schedule SE because I don't have any income to record it on. So let's mirror that over here. If I go to the income statement, 130,000, 10,000 loss, pulling that onto my other taxes. So now see that said like this to come out to zero. And it comes out to a negative number. So what I'd like to do is make this cell be zero if it's less than one. So to do that, I can use an if a logic function. So I'm going to say equals if brackets. If this times this is greater than zero, then that's a comma. I would like you to do this times this. But if not comma do a zero. And I know I did that kind of fast because it's not an Excel course, but that's the general idea of the logic function. And so now we come up to a zero here and everything should should mirror out properly in that case. So that should work out. All right. Well, what about a scenario where we have income that's greater than the, the, the cap of the 147,000. Let's do that. Say, okay, what if we did that happen? Then I'm going to say we had, let's say this was back. Let's just make this, let's make this 20,000. And this is going to be 100, let's say 200,000, 200,000. So now I have income of 180,000. So what's that going to do to the schedule? S E it's going to, it's going to cap the social security side at the 147, but not the Medicare Medicare co-payments for a year side. And notice you might see this is why you might be thinking, why couldn't I, if let's do this back on over here. If I go, if I go, this was up to 200,000 and payments and credits. So then you might say, uh, income subject, this not 200,000. K the heck passo. And this needs to be 20,000. Does that do it? Is that what I had over here? 200,000 minus 20,000. Yes, indeed. All right, let's bring that on over here. So you might say, why can't I take this plus, why can't I take this that comes from there and just multiply it time from this plus this. And would be that and you could if you didn't hit that cap because then you're just combining the social security and Medicare, but you can't because there's a cap on the medic on the social security if you have income over 147. So in this case, notice what it did. It said, okay, 180,000 times that percent gives us the 166 230 for social security. I capped it taking the men, the lesser of those two numbers, but for Medicare, we did not cap it. And so now you've got to multiply this one times the 12.4 social security rate and this one times the 2.9. So you could sum it up at the 23 49, which is what we got over here at 23 49. Is that what we got 23 49. Boom. So that's what happens if you have a loss or a situation that you go over the cap and you may not need to recalculate this. This might be too much detail, but you want to be able to kind of understand what's going to be happening as income level goes over that amount. Now, the other thing just to note that it's possible that you have two schedule sees, right? If you had two businesses, you'd have two schedule sees possibly. I won't put in all the other information. I'm just going to say the other one had income of 20,000. And if I pull that one over now, if I go to my schedule sees, I got schedule C one and two, but the two schedule sees are for the same social security number that we're using to pay in to kind of the equivalent of payroll taxes. So that means I can put those two schedule sees together the 20,000 and over here the 180,000 to pull into the schedule C with just schedule SE with just one schedule SE. However, if they were married, then as we've talked about this a little bit when we looked at the married before, but you could have a situation where they're married and then you have two separate businesses possibly by the two couples and then you would need two separate schedule SEs, right? So if they're married, it's really important to say this isn't the taxpayer anymore. It's the spouse. So now they both have their own business. And so then if I pull that one over, now I've got two schedule sees with two different businesses and then I have two different schedule SEs because for Noah and Neo and Jane, because they have their own, because it needs to be applied to their own account. Note that that's really important because it's something that can be easily overlooked because the net impact on the total self-employment tax will likely be the same whether you do that or not, but you will have a difference in terms of who's being allocated the income to their social security, which will impact the benefits that they get on retirement. So you could get into like the weeds in terms of how much could I put into social security between the two married couples? How much should be allocated to each of them to maximize the benefits and try to organize your working business structure to try to maximize that? Some people do that or it might be worthwhile to think about that. You can also have a situation where you have one business, one schedule SE with two partners, which we talked about a little bit before when we think about married filing joint or married filing separate. And you would think that you might have to, there's a couple ways you could deal with that. It's now kind of a partnership in one sense. So you could actually have a partnership even though it's a married couple, which means you would have to file another return and then use the K1s from the partnership return to file the proper amounts to the proper SEs, schedule SE for each individual or if you're in a community property state, you might be able to have an exception to that and break it and use one item. So for example, if I delete this and I said it was joint, it was joint, then I can go back on over here. Now I have one schedule SE, but it broke out the income evenly because it's a joint property or community property is the assumption between the two schedule SEs for the married couple that has the business because they're splitting it down the middle because one entity married couple was the concept. But you got to make sure that you're in the proper community property state and that you can do that. The other option would be possibly to try to file two schedule SEs giving the proper allocation between the partners on the two schedule SEs. That's kind of tedious to do because then you'd have to take your income statement and kind of break it out and data input twice, but it might be easier to do than it would be to do a whole another return for a partnership and do the flow through entity would certainly be cheaper if you got a tax professional to do it possibly to do a partnership return because that usually costs more. So those are some options to kind of look into there. Make sure you're understanding not just the tax for the current year that you're paying to social security, but also if you're married couple or even if not a married couple, but it gets more complex if you're a married couple trying to determine what the impact is on your benefits for paying into social security between the two spouses so that you can think about how you can maximize your working scenario to try to maximize the benefits since you're paying into the social security system and everything.