 Income tax 2021-2022. Income reporting forms. Get ready to get refunds to the max. Diving into income tax 2021-2022. Within the income tax formula, we're at the top line, the income line, which can look deceptively simple because it's just that one line. But if you're thinking about it in terms of say, for example, an Excel worksheet, this being the summary sheet, then all the other sheets are feeding into it in some way. Or if you think about this as in essence, the first page of the 1040, other forms flowing into it, possibly forms flowing into like the income line, such as schedule one, schedule C, schedule D, and so on. So it can be quite complex when you dive in or dig down or drill into the detail. So what is income just in terms of a transaction from an economy standpoint? It's useful to note that you're always gonna have basically two sides of the transaction. So if you have a lawyer over here that is doing work, then they're gonna be providing work and let's say they're doing work for someone that's representing a business who's gonna be paying the lawyer. So obviously in this case, if you look at it from the perspective of the lawyer, they're getting the income and that income with regards to taxes is something on an income tax side that could be subject to taxation. So that's what you'd be reporting and paying taxes on. How could you verify that you're going to be getting paid? Well, the IRS has leverage on the payer because on the payer's side of things, let's say it was a business paying for legal services, they're gonna want the expense, they're gonna want the deduction of the legal services. So in order to do that, the IRS is gonna have some pressure. They're gonna say, well, if this person over here was an employee doing legal services, then we're gonna require the payer to call it payroll and we're gonna require you not only to give the employee the wages, but also and the W-2, we're gonna require you to give us a W-2. And that's how the IRS, that's how this kind of system works, right? They're gonna pressure the payer typically to give the reporting requirements. That's where our forms come from, the W-2 forms and the 1099 forms being the primary items. Let's say that this person is a contractor not working for, but doing a job for this business. Well, again, this business would want to be taking the deduction. The IRS is gonna say, okay, they're not an employee, but we still want you to be 1099 and issue a 1099 not only to the contractor, but to the IRS. So the IRS has the information so that they can get that information as well. So those are the two major forms involved. Now you can see where there's a shortfall, where there's a problem here. What if this is just an individual on this side and not a business? And they're hiring a lawyer for, say, personal lawyers for a family lawyer or something like that. Family law, for example, divorce case or something like that. Well, then the IRS cannot pressure the payer because the payer is paying for something personal. So they don't have the same kind of leverage. So in that case, the person receiving the income would still have to report it. But the IRS doesn't have that double check kind of factor of being able to pressure the payer because the payer isn't a business in that case, they would just be an individual. And that's where the IRS is a little bit more skeptical. I kind of feel like that's why they crack down so much on the COVID. They've never really liked bars and restaurants and salons and hair and nails kind of places because those are the kind of places that serve end users' customers and they can't pressure the end user to tell the IRS exactly what they earned. But in any case, that's the general idea. So if we were talking about this being an issuing a 1040 or putting on the form 1040 the income that they earned, if they were an employee, then if this was the employer, they would have to issue, of course, the W-2 form, which would be reporting the transaction, the money that went to the employee. And then of course, the employee would then use that W-2 form in order to process or record their taxes so that, and they have to do it in accordance with the W-2 because that W-2 also went to the government. The government has that W-2. So we're just kind of double checking. The government could in that case basically report that part of your income already because they have the W-2, but you're kind of reporting it at the same time. And so if on the other hand, it was a contractor situation, if this was the employer as a contractor, they might then have to issue a 1099. Then the contractor over here that did the work would have to still report it on the form 1040, but this time they would most likely be having a Schedule C business. And in this event, they would only get the 1099 from the person they did the work for. If the person they did the work for was a business and the IRS was able to pressure them and say, hey, do you want to get the deduction? Then you better be in compliance by issuing a 1099 so that we can get the money from this person over here and make sure they're paying their taxes. If on the other hand, this is an individual, the IRS doesn't have that pressure to force them to get issue a 1099. So if this was a lawyer doing like family law or something like that, or if they were a restaurant or they're doing a salon and they have their chair or something like that, then this person over here, the one that's paying the customer is gonna be an end user and the IRS doesn't have that same kind of leverage. So that means the business owner's not gonna get the 1099 in that case, but they should still be reporting the income. So that's gonna be the general idea of it. So the different forms we're talking about then would be a W2 form and usually for smaller kind of returns, then you're gonna be happy in these forms that will of course drive your data input. And as a tax preparer, you wanna think about the idea of do I wanna do smaller returns or do I wanna specialize in larger returns and then tailor your tax business towards that because you wanna make sure that you're working within your niche. And so if your business model is to do a fairly low profit margin, but do a lot of returns that are gonna be somewhat automated, possibly using software that's gonna help you to automate the whole process, then that's what you wanna focus in on and if you've got returns that are more complex, maybe you partner up with other types of tax preparers that can help you to pick up those more complex components as well. Or are you a tax preparer that does specialize as in business returns, which are typically more complex and might not have as much forms that are gonna drive the data input or are you gonna focus on larger and higher income people which often have property and so on, rental property and second homes and so on, which can complicate things. And so therefore one return will take more time but y'all bigger profit margins. So when we have the interest income, that's gonna be a 1099 INT, typically that you're gonna be getting. The format of these might look a little bit more different from the bank or different banks, but the box numbers will remain the same. We'll talk more about them in future presentations. We'll look at each of these forms or most of them in more detail. Royalties, for example, 1099 miscellaneous dividends, 1099 DIV, which you're gonna get from like your mortgage brokers and so on for stocks and bonds and whatnot that you might be having or stocks that you might have. Distribution from retirement plans. So this of course will be more applicable typically for people that are in the retirement, are in retirement, they're getting money out of their retirement plans as opposed to putting money into the retirement plans. And those then are gonna be counted as income because they got the benefit of a tax benefit and tax benefits of not being taxed on innocence, the earnings up until the point that it's distributed. So when they distributed, that's when the income is gonna be had at that point, gain on sale of investments, 1099 B. So if you sold something like stocks and bonds or the typical types of things that would be sold there, business income, 1099 NEC. This is a relatively new form and it's gonna be used quite often because it used to be reported on the 1099 miscellaneous. So that's gonna be quite common. Social security, SSA 1099. This would be a 1099, meaning you're getting the benefit back. You're not, this isn't you paying into the social security that you would be doing if you're working as an employee or self-employed that's taken out of your wages or you're paying self-employment tax. This is you receiving the benefits at basically, you know, older years at in essence retirement kind of age. And you would see if you have to report that as income. We'll talk about that later. Gambling windings possibly being reported on W2G. So if you went to Las Vegas or something and you got gambling windings, then W2G is something that you might get. If you pay independent contractors, you may have to file form 1099 NEC, non-employee compensation to report payments for services performed for your trade or business. If the following four conditions are met, you must generally report a payment as non. We've got the W2G. Now these are gonna be some of the more common types of forms that you might have. And when you get those forms that's gonna basically drive your data input and you might even be able to automate that if you've got some fancy software to help you just take that information in and populate it. But remember, as tax returns become more complex, then these forms in and of themselves might not be, you know, aren't gonna be sufficient in order for you to populate the tax returns because for example, you might have income that is not reported by some of these forms. And when you're talking about income like business income, if it's a Schedule C type of business or something like that, then of course you're gonna have the expenses that will be related to it as well that you're gonna have to take into consideration. So as a tax preparer, your job or what you wanna think about is do I want to have a high volume of returns that I would like to be populating as automatically as possible that will be driven by just the data input forms? What do those returns look like? How to pick up those clients? What will be the profit margin looking like there? Or do I wanna have a system where I'm gonna focus more on complex returns, possibly complex returns with a business component if you have more of a business nature, possibly an accounting background, a CPA for example, picking up Schedule C businesses, possibly then to other types of entities like flow through entities as corporations, LLCs for example, even those places you probably wanna specialize in a particular industry if possible maybe. And then or do you wanna basically focus on higher income in essence tax returns that will have just more complexity just in general due to more investment income, most likely property, possibly vacation homes and so on. And as you get into more complexity then you're gonna have to go beyond just the data input forms to report all the other added kind of components that will be involved. So we'll talk more about some of these forms and how to report that in future presentations.