 Income Tax 2022-2023 Employment Taxes 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. Most of this information comes from the Tax Guide for Small Business for Individuals Who Use Schedule C, Publication 334 Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Income tax formula focused online, one that being income. Remembering the first half of the income tax formula is an essence in income statement. Although just a framework, just a scaffolding, other forms feeding into these line items. For example, the Schedule C, our major focus here being another income statement. Income minus expenses, those expenses being business deductions, the net income flowing into line one of our income tax formula. This is page one of the Form 1040, the Schedule C income would flow through to the Schedule 1, then ultimately to page one of the Form 1040. This is a Schedule C profit or loss from business, which is an essence and income statement. Income minus expenses. Now we're going to dive into employment taxes. But before we do, we want to make a distinction between employment taxes and self-employment tax. We talked about in a prior presentation, they are similar but different. When we're talking about self-employment tax, we're thinking about taxes we might have to pay on self-employment income, such as the bottom line net income of the Schedule C for our small business. When we're talking about employment taxes, we're thinking about taxes we might have to pay and we might have to withhold on the income of our employees, the money going out. It's actually an expense to us that we might have to be paying taxes on for our payroll taxes in essence. So you can see the difference here when we're talking about self-employment tax, the net income of the Schedule C is being treated in a similar way as if we were an employee of our own business. In a similar way as if we were the employee of another corporation. We're going to be paying both the employee and employer portion of our payroll taxes, social security and Medicare in the form of self-employment taxes. When we're talking about employment taxes, now we are the employer and we have employees. That structure is basically the same no matter what type of entity we have. If we're a sole proprietorship, a partnership, an LLC, a C corporation, we're going to set up our employment situation in a similar way. We're going to have to issue the W-2s. We're going to have to have the withholdings. We're going to have to pay our portion of the payroll taxes. But notice when we pay our portion of the payroll taxes, it's kind of interesting because we're actually paying taxes on an expense to us. We're paying taxes on not our income. It's not an income tax. It's income to the employee. And we're having to pay social security and Medicare on the expense that we basically pay to the employee as opposed to the self-employment tax. We're paying basically self-employment tax on our income, the self-employment income treating ourselves as the employee and employer. Okay, so we're on employment taxes. If you have employees, you will need to file forms to report employment taxes. Employment taxes include the following. Note that when we talk about employees, you will not be an employee of yourself generally when you have a schedule C. If you had another type of entity such as an S corporation or a normal corporation, then you might have to actually issue yourself a W-2 because the corporation is like a separate legal entity. So that means that when you have employees for a sole proprietorship, then you will be issuing W-2s for the employees you have deducting the expenses of having employees. The net income then is going to be taxed in the format of self-employment tax with regard to like the payroll taxes. Okay, so we got social security, Medicare taxes, the federal income tax withholdings. So when we have employees, we're going to have to then deal with our portion and their portion of social security and Medicare, the payroll taxes. We're going to have to deal with the federal income tax. Don't get that confused with our federal income tax that we're going to be reporting on the form 1040. The bottom line, this is their federal income tax that we are withholding from them. So we're paying them, they're going to have to pay federal income tax. We're withholding, you know, their federal income tax. Yeah, maybe I'll file a federal income tax return. So, and then we've got the federal unemployment tax. That's the FUTA tax. That's the tax that we have to pay an employer only tax. So for more information, see Publication 15, Circular E, Employer's Tax Guide. That publication explains tax responsibilities as an employer. Now dealing with payroll is in and of itself a whole topic in and of itself. It does get quite complex quite easily. And you do want to make sure it's one of those things that you want to do right the first time. Note that if you have any lawsuits or anything like that, unfortunately, those are most likely to come from employees or ex-employees. So you want to make sure that you have everything documented as best you can. If you're using tax software like a QuickBooks or something like that, then there's usually going to be an add-on type of feature to help you to process the payroll. And that's one way that you can deal with payroll. Another way you can deal with payroll is by hiring a third-party payroll provider. The big ones are like an EDP or a paychecks or payroll. They process payroll. They specialize in payroll and might also be able to help with like some human resources kind of stuff. But when dealing with payroll, you might first want to go to your accountant or your CPA, for example, and get an opinion about how you should deal with payroll and whether or not you should structure an employee or situation from the beginning before you talk to people that are going to make their money by selling you payroll. You want to talk to someone who's not going to benefit from you buying payroll from them or their services, but get an independent decision and then go to your payroll providers and see which one would be the best one to deal with. Also note, if you're sole proprietorship and you're trying to grow, there's a few different ways. If you need human capital, other people working for you, you could either hire them as contractors, possibly, depending on the structure. You could hire them as employees, possibly, or you can hire them as equity partners in the partnership kind of situation. If you hire them as employees, you have the most control over them, what they're going to do and whatnot. But then you have to deal with payroll taxes, which is, of course, a mess. If you hire them as a contractor, you got to make sure that they qualify as a contractor. Otherwise, the IRS might say that, no, they're employees and then they get you in trouble on that sense. You got to make sure that they are contractors in nature and then you still may have to issue them a 1099, but you don't have to deal with the payroll taxes so much. But, of course, you don't have as much control. The contractors are likely to come and go more than if they were a W-2 employee and then you could hire someone as an equity partner, giving them an equity interest in the revenue of the business. But in that situation, you need to be careful with liability because an equity partner can make decisions on your behalf. So they might make decisions that you're liable to and obviously you lose a lot of control in your decision-making process as now you have basically a committee making decisions and the tax returns become more complex because instead of filing a Schedule C, you generally have to file a partnership return and then have it flow through to the 1040s. Alright, so caution. Do not reduce your deduction for social security and Medicare taxes by the non-refundable portions of the Family's First Coronavirus Response Act and American Rescue Plan Act of 2021. Credits for qualified sick and family leave wages claimed on employment tax return instead report the credits as income. So this was a whole situation that happened with the coronavirus situation and they tried to kind of shore up payroll, help people to stay on payroll. So you've got to be careful of that situation. Hopefully after this is kind of ironed itself out, we'll be back into the normal kind of payroll structure going forward. To help you determine whether the people working for you are your employees, you can see Publication 15A. Now remember from the IRS's perspective, they like the structure to be an employee or employee situation. Why? Because they can force the employer to withhold. So that's the structure from the IRS's perspective you would kind of imagine them angling towards. They're going to try to act like it's a cut and dry scenario as to whether you should be an employee or a contractor. If you make someone a contractor and the IRS says they should be an employee, then you might end up having to pay payroll taxes and whatnot. So then you have to make sure that you have correctly categorized someone as a contractor or vice versa. And vice versa. But usually it goes in the case of as a contractor and you can go to Publication 15A. So do they do their own work? Do they have their own tools? Do they have their own hours? And that kind of stuff would help to determine whether they're a contractor versus an employee. That publication has information to help you determine whether an individual is an independent contractor or an employee caution. If you incorrectly classify an employee as an independent contractor, you may be held liable for employment taxes for that worker plus penalty. So again, the IRS is trying, you could see them angling towards you being their tax collector, meaning an employee-employer situation and they don't really like the contractor situation as much. So you're going to have to make sure that you can argue if you want a contractor instead of an employee-employer situation why that works in accordance with their code. An independent contractor is someone who is self-employed. So you generally do not have to withhold or pay any taxes on payments made to an independent contractor. Notice if you're paying a contractor, it's basically as easy as paying almost like any other bill. Paying the utility bill is not a problem. I don't need to hire a whole other payroll company to pay the utility bill. I just say, well, how much did I work? Here's the money. Let's shake hands. Let's make an agreement. But with payroll, it's way more complex than that because of course you have to deal with the withholdings and all that kind of stuff. So you have to balance the complexity of hiring versus a contractor and whether or not you can hire someone as a contractor.